Has the recent bumpy ride of the stock market run its course or is the market going to continue to fluctuate?
No one knows the answer to that question for sure, but financial experts are willing to speculate.
David Joy, chief market strategist for Ameriprise, explained, “Whether the sudden move lower of the past two weeks has run its course is impossible to say. There may be other forced sellers who have yet to surface.”
But whether or not the market can make turnaround to the positive and hold onto it, this downturn is different because the fault lies with bonds, according to Joy.
“What is notable about this correction is that its proximate cause, namely wrong-footed short-volatility positioning, is not the real culprit. That distinction belongs to the more insidious rise in bond yields that spooked equity markets in the first place. The most recent move higher in bond yields has been underway since mid-December, when the 10-year Treasury note yield was 2.4 percent and the two-year yield was 1.8,” he said.
“When stocks peaked six weeks later on January 26, these yields had climbed to 2.66 and 2.09 percent, a rise that was both noteworthy but also relatively orderly. Over the following week, however, these yields jumped to 2.84 and 2.16, as the Fed meeting was perceived as slightly more hawkish, and as increasing talk about rising inflationary pressures was inflamed by the January jobs report which showed the fastest rise in average hourly earnings in nine years, taking stocks lower in the process,” Joy said.
However, he does not see any real cause for concern now because of strong U.S. economic growth, which should be enhanced by tax reform and the additional fiscal stimulus found in the budget and infrastructure deals.
The next big hurdle will be Wednesday’s report on consumer prices, says Joy.
After such a long, smooth run, the two 1,000-point drops in the Dow this month seem alarming to many, but neither managed to crack the top 100 declines in history, noted John Lynch, chief investment strategist for LPL Financial.
“Corrections are never fun, but they also aren’t new territory for investors. Prior to the most recent example, we have experienced 36 corrections since 1980, and the S&P 500 fell by an average of 15.6 percent from peak to trough during these periods,” Lynch said. “Considering positive economic data and rising corporate profits, we remain favorable on the longer-term investing environment despite the near-term volatility as leveraged trades continue to unwind in a messy and choppy fashion.”