The Factors Behind Monday’s Selling
February 6, 2018, 5:10 pm
The Dow briefly dipped into full 10% correction territory yesterday as the volatility unleashed last week spread across Wall Street. While some of the selling came from the biggest shadows on the market – disappointing earnings from several hot mega-cap stocks and rising bond yields – also weighing on the indices was forced liquidation and worries about long-dormant inflation back on the economic landscape.
Wages edged up 2.5% last year, even before tax reform was passed. We haven’t seen real wage inflation since the Alan Greenspan years. It’s usually a sign of an economy that’s reached full employment and growing to the point where managers need to compete harder for talent. While no form of inflation is necessarily “good,” wage inflation is generally more benign than what we see when prices throughout the economy climb due to commodity-linked shortages.
Since even a hawkish Federal Reserve will be more lenient with wage inflation than other forms, it’s going to take a few months before policy makers shift focus to long-ignored and long-depressed price indicators that are now back in play. Until then, pressure on short-term interest rates will remain subdued – we actually saw one-month Treasury yields dip last week around the Fed meeting – and the long end of the yield curve still tells us more about market angst than the real economy. Yes, Treasury yields are on the rise, but it’s no surprise to see that demand for U.S. debt is lagging with all the bickering around the federal budget, a weakening dollar and a ballooning deficit.
Even so, rising bond yields have historically meant rough sledding for the financial sector. We saw a similar pattern emerge last summer and the banks recovered and thrived, and I expect we’ll see that again once the weight of the Fed’s sanctions on Wells Fargo (WFC) lifts. Likewise, while a weak dollar will ultimately be a boon for U.S. exporters and oil prices, it’s going to take a little time before that story filters into stocks like ExxonMobil (XOM), Chevron (CVX), Johnson & Johnson (JNJ) and Procter & Gamble (PG), which have been some of the biggest drags on the Dow in particular.
Then there’s Big Tech. Yesterday we saw the banks’ weakness turn into strength for the FANG group and similar NASDAQ giants. This is a good sign, as it shows that investors aren’t selling everything in sight.
I know the selling isn’t easy to watch when it happens, but I actually believe this is what’s best for the market right now. I don’t see the current action as the beginning of a bigger downtrend and I expect the market to resume its rally once the bond market stabilizes (which we saw a little of today), the sellers grow tired and buyers step in to take advantage of stocks at discounted levels that we haven’t seen in a while.