It was one of the worst weeks for equities in recent memory as the S&P500 skidded -6% and the tech-heavy Nasdaq gave back -6.5%. The pressure over the last two weeks is bringing the lows set back in early February (following a 9 day pullback that commenced after all-time highs were set on January 26) back in close proximity. Those who were feeling emboldened and relieved by a very abbreviated corrective phase and V-shaped recovery over the balance of February may be starting to feel less confident. Simply, the variety of troubling headlines in recent weeks are the most obvious catalyst for retesting lows set several weeks back and sentiment appears to be eroding based on continued developments around international trade (trade war fears) and ongoing White House drama (budget, scandal, personnel changes, etc). Troubling as those themes are, deteriorating sentiment is ordinarily a requisite condition for corrections to actually have any cleansing effect and deter risky investor behavior.
Heading into March, it was beginning to feel as if the markets might revisit the correction lows plumbed in Early February amid still choppy trade. The S&P500 gave back more than -3.5% of its rebound over between February 27 and March 1 with sentiment eroding fast on the back of protectionist and trade-war rhetoric emanating from the Trump administration. That may still occur, but interestingly while the fury over trade-related tension remained elevated throughout last week and is still top of mind for many, financial markets began behaving better. In fact, the S&P500 managed to stage several mid-day reversals and close appreciably higher in 4 of the 5 days last week; the full-week experience was actually one of the best so far in 2018. The S&P500 climbed a strong +3.5% with half of that gain occurring on Friday, the 9th birthday of the current bull market (3/9) in concert with what can only be described as a blowout strong employment report for February.
Early in February the S&P500 and other indexes fell into correction territory. Recall, a correction in the financial markets is a 10% or greater decline from recent highs, which occurred on January 26th. Pullbacks, even in strong uptrends, are historically considered normal. But this was the first drawdown of -5% or more in 404 trading days running since February 11, 2016. Is the correction overdone? Perhaps, but it was probably overdue. Market agitation was brought on by 3 occurrences – feelings that valuation was stretched; a big jump in volatility; and uncertainty about inflation (more below). Also, many investors remain concerned that valuations are stretched, and they became shocked by increased volatility following 23 months of calm and steadily rising stock prices.