My blog post last week warned of a possible correction due to Trump’s future withdrawal from NAFTA. I believed that a pullback was in the cards but you never know what will trigger a sell off. The pullback started to get some steam on Thursday afternoon when the Atlanta Fed released their projections for first quarter GDP growth to come in at 5.4 per cent!
That really spooked the stock market since 4th quarter GDP was only 2.6 percent which was below consensus estimates of 3 percent. The Friday’s job numbers fueled the downdraft even further as investors digested a stronger-than-expected jobs report where the average hourly wages rose more than expect.
Higher wages can point to higher inflation, which, in turn, could lead the Fed to raise interest rates more aggressively. Those concerns allowed the 10-year Treasury yield to rise above 2.8 percent.
Keep in mind that the S&P 500 has risen 6 percent in the year to date and is on track for its 10th straight month of gains. At these levels, this would be the best January since 1997. The S&P’s relative strength index ended last week at 90, its highest level on record. (Overbought territory) Its price-to-earnings ratio hit 18.44 times forward earnings this week, its highest level since May 2002.
Two other factors that may have contributed to the main benchmarks suffering their biggest one-day drops in more than a year and posting the steepest weekly losses in about two years.
- Friday marked the last day for Janet Yellen as the head of the Federal Reserve, giving way to her successor, 64-year-old Jerome Powell. Powell’s entry adds uncertainty into the markets.
- The politics in D.C. with the release of the Nunes memo adds political uncertainty as to whether the business friendly republicans will lose in the November elections.
The Dow Jones futures market points to a negative opening on Monday. There could be even more selling pressure near the end of the week because of a possible government shut down over Trump’s immigration demands.
Why you shouldn’t worry
- The Atlanta Fed was also optimistic about the 2017 first quarter, estimating growth at one point to be 3.4 percent, where the final reading came in at 1.2 percent.
- Higher wages doesn’t always lead to higher inflation. Consumers could opt not to spend but pay down debt or increase their savings.
- Over the long run, good quality stocks will outperform bonds.
In my thirty plus years of investing, I have seen many bear markets and corrections. Ask yourself a simple question. How many millionaires do you know that became wealthy by investing in savings accounts?
What is on my shopping list? U.S. financials and technology.