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Comerica Weekly Market Overview

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In a week of turbulent paradoxes, U.S. equity markets produced the largest sell-off since early 2016, and the catalyst was positive economic news.



Weekly Market Overview

February 5, 2018
By Peter Sorrentino, Chief Investment Officer

In a week of turbulent paradoxes, U.S. equity markets produced the largest sell-off since early 2016, and the catalyst was positive economic news. Both the S&P 500® Index and Russell 2000® Index slipped 3.8%. Elsewhere, developed global markets fell 2.8% and emerging markets lost 3.3%. The domestic sectors hit worst by the decline were energy and materials, off 6.5% and 5.7%, respectively. The least impacted were utilities (off 2.3%) and financials (off 2.7%). Stock prices were, by no means, the only prices falling last week. With the exception of corn, wheat and sugar, the entire commodity complex fell an average of 2% last week. Bond prices fell as inflation concerns led investors to demand higher returns for tying up capital. Again, all of this is amid a generally positive earnings reporting season in which corporate managements have spoken optimistically about their prospects for this year. Without the backdrop of quantitative easing to ensure that easy money will suppress any significant rise in long interest rates, investors are once again forced to factor in a cost for capital. Once more, human folly crashes hard against reality’s rocky shore.

To be clear, we have not had a meaningful price correction since this advance began. The Italian mathematician, Leonardo Fibonacci, developed a mathematical system that identified repeating patterns in nature, from the structure of pinecones to the petals of a flower, these patterns can be defined and predicted. He also sought to employ mathematics to understand human behavior. As it pertains to financial markets, it is not uncommon to witness a rapidly rising, or even falling, price to stop and suddenly reverse course. A Fibonacci retracement describes a reversal that covers 32.1% of the preceding movement, in the opposite direction. Burton Malkiel took great pains in his book, A Random Walk on Wall Street, to discredit Fibonacci’s numbers in finance, and yet, they remain with us today. All of this is to say that it would not be unusual or remotely fatal to this market advance to undergo a 5,750-point decline of the Dow Jones Industrial average. Were this to occur, it would take us back to where we were in October of 2016. The backdrop of a strong economy, full employment and more energy reserves than any time since the 1950’s, is hardly the makings of the next dark ages. Unless you will need the money within the next few years, being fully invested still offers better opportunity than sitting in cash – just be prepared for a more interesting journey.

 

Source: All statistics herein obtained from Bloomberg.

 

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