Pando Perspectives on Market Pullback

by Catherine Trinder Miller, February 3, 2018

The decline in the S&P 500, which accelerated in the afternoon Friday, was driven in large part by concerns at the pace of potential Federal Reserve interest rate increases. The nonfarm payroll jobs report released yesterday morning telegraphed strong job growth of 200,000 and acceleration in wage growth with average hourly earnings up 2.9% in the past year, the largest 12-month increase since 2008-09.1 Wage growth is a key factor the market is watching as it assesses the pace of inflation and the possible path for Federal Reserve interest rates hikes. Modest but steady growth, low inflation, and low interest rates have characterized the economic regime underlying strong recent equity market performance.

As the U.S. labor market tightens, wage inflation is expected to increase, so the jobs report is consistent with the price dynamics we would expect in a low unemployment environment. Given this, investors are adjusting to the possibility that the Federal Reserve may raise interest rates more than initially expected this year. This could drive higher volatility in asset prices and also some consolidation in the recent strong equity market returns.

It is important to remember that underlying this strong job growth is an economy that is accelerating. By the end of yesterday, half of the companies in the S&P 500 have reported their quarterly earnings. Earnings growth in the quarter thus far has been extraordinary, up 17.3%, the highest growth since the third quarter of 2011 according to Thompson Reuters. More importantly, revenues are growing at 8% year over year, with 82% of the companies reporting thus far beating revenue estimates.2 This economic strength is not just U.S.-driven, but rather can be seen around the globe.

So where does that leave investors? The fundamentals supporting the rise in equity markets both in the US and globally are strong, driven primarily by improving corporate revenues and earnings. The U.S. enjoys additional economic tailwinds through lower regulation and major tax reform passed at year end.

Equity markets do not move up in a straight line. Volatility is inherent in equity market investing. Diversification is essential to help stay the course through periods of volatility. With economic fundamentals remaining strong, we view the current pullback as healthy and are vigilant in seeking opportunities to put capital to work as equity prices become more compelling.

1 Scott J. Brown, Ph.D., Chief Economist, Raymond James Financial, Weekly Market Snapshot, 2/2/2018
2 Thompson Reuters

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Catherine Miller and Teri Benson and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. No investment strategy can guarantee success. Diversification and asset allocation do not ensure a profit or protect against a loss.

Past performance may not be indicative of future results. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor results will vary.

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