U.S. stock markets have been whipsawed recently, dipping into correction territory on Feb 8 as the benchmark S&P 500 fell -10.2% from the high of Jan 26 in just 10 trading days. Large losses started on Feb 2 when the January employment report showed wages growing +2.9% y/y, the fastest of the nine-year recovery. The increase in wages raised the specter of a Fed accelerating its rate hikes to fend off inflation, and it drove up long-term interest rates which are sensitive to inflation. Rising yields pressure asset prices lower, and the 10-year Treasury note has recently risen to 2.9%, the highest in four years. Caution is warranted as rising yields either from increasing inflation or increasing Treasury issuance will have to be offset by either higher stock prices or lower valuations. However, some perspective is also required. The worst day of this correction saw a drop of -4.2%, but over the past 20 years, the market has fallen more than that on 42 occasions. And -10% corrections are not unusual – the last time was a mere two years ago. Finally, the stock market is a poor indicator of the economy – the fundamentals remain solid and we maintain our forecast of +2.6% GDP growth in 2018.
