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Brushing Off the Winter Chill

March 27, 2018, 10:34 am

With parts of the country still digging out from their fourth winter storm in as many weeks, it’s starting to look like March came in like a lion – full of bluster and volatility – and will leave the same way. The stock market looks very similar. We got a little relief early on from February’s volatility, but the last few days have put the broad market back on the rollercoaster.

The S&P 500 lost 6% last week, relapsing to within sight of correction territory. The blue-chip Dow industrials were once again down 10% from their peak, and the controversy over the role Facebook (FB) data played in the 2016 election helped push the once-ebullient NASDAQ down 8% from its more recent record.

A full 93% of all mid-cap and larger stocks were taken into the rest on Friday. Even a lot of the classically defensive themes like consumer products and medical supply companies felt the heat. Hints of a trade war on the horizon weren’t kind to the global exporters like Caterpillar (CAT) and Boeing (BA). Add Facebook’s woes to an overbought Big Tech universe and the NASDAQ was in no condition to maintain leadership.

No investor wants these kinds of weeks, but they do happen, and we went through it all not long ago. We saw then that when the selling gets this indiscriminate, bargain hunters emerge to pick up stocks at a discount and get strong charts moving again. I expect that to happen this time as well, especially with the approaching earnings season on track to be very strong.

These are the times when you don’t want to overreact, and I suspect more than a few investors did as they forgot the lessons from February. There may be some lingering effects from what we’ve seen in the last week, which included a month’s worth of up-or-down 1%-3% sessions packed. In the grand scheme of things, this is actually what healthy volatility feels like. Electronic circuit breakers don’t even start kicking in until the S&P 500 falls close to three times as far as it did on Thursday.

The S&P 500 successfully holding its 200-day moving average on Friday and reports over the weekend that the United States and China are willing to negotiate tariffs and trade imbalances to avert a trade war alleviated concerns and brought the bulls back out in the force. Any additional positive news and anticipation of big earnings expectations should help stocks get back to firing on all cylinders.

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