Economic Updates

March 2018 Economic Update with Tony Drake, CFP®

In this video, we will cover main topics that were part of the economic headlines in the last month and how those headlines influenced the markets and economic outlook. We will also try to give you some insight into what those influences might mean for you as an investor.

 

Domestic markets started 2018 with their best monthly performance since at least 2016, only to stumble in February. Both the S&P 500 and Dow had their 1st monthly losses in 10 months, breaking their longest winning streaks since 1959. Overall, the S&P 500 lost 3.9%, the Dow dropped 4.3%, and the NASDAQ gave back 1.9%.

These losses came as volatility picked up throughout the month. In early February, we experienced back-to-back stock selloffs, followed by large jumps. During one week, the Dow lost 1,000 points and gained back 300, twice. But, this volatility wasn’t the result of negative economic data or geopolitical problems. Instead, a combination of emotional investing and computer-generated trading may be to blame.

Essentially, investors became concerned about inflation when the labor report indicated that wage growth was picking up.

In other economic news, we received a variety of positive and negative reports. The most recent data for housing showed both new and existing home sales dropped in January. Housing starts, on the other hand, hit their 2nd-highest rate since the recession.

We also received the 2nd reading of 4th-quarter Gross Domestic Product. At 2.5%, the growth matched expectations.

Ultimately, though, worry about inflation—and the resulting potential for interest rate increases—contributed to much of the month’s volatility.

By the end of February, comments from new Federal Reserve Chair Jerome Powell led some investors to believe interest rates may, in fact, rise faster than anticipated. In testimony to the House Financial Services Committee, Powell spoke of growing global strength and stimulative fiscal policy. He also said that inflation may be moving closer to the Fed’s target rate. This positive view of the economy could potentially result in 4 interest-rate increases in 2018.

On February 27th, stocks dropped significantly in response to Powell’s testimony. The volatility continued the next day, as stocks whipped back and forth before ultimately ending down.

If February’s volatility feels unnerving, that may be due to the markets’ unusual calm in 2017. Since 1980, the average annual S&P 500 correction has been approximately 14%. Last year, however, stocks only fluctuated 3%.

When considering last month’s fluctuations, remember that positive economic perspectives were behind much of the movement. Despite the volatility, consumer confidence easily beat expectations and showed that people feel particularly good about the labor market. Jobless claims supported this perspective, as new unemployment filings remained near historical lows.

Moving into March, we will pay close attention to inflation, interest rates, and investor behavior. On March 21st, the Fed may raise interest rates again and provide greater insight into their expectations for the year ahead. As developments arise, we will keep you informed.
That’s it for this month’s educational economic update.

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Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. Drake & Associates does not offer tax or legal advice.