Week In Review: A Wild Ride
The equity market dropped sharply this week, with the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite losing around 5.0% apiece in volatile trading. Sizable gains on Tuesday and Friday helped keep losses somewhat in check, but they couldn't keep the major indices positive for the year. The three averages are down between 0.4% and 2.1% year to date.
This week's selling was related to fears about rising interest rates, and the realization that stocks have gone too far, too fast, but it was a collective de-risking effort following the implosion of short volatility ETFs that acted as the expedient for broad-based and indiscriminate selling activity. The S&P 500 soared 7.5% in the first four weeks of 2018 on top of last year's 19.4% rally.
Technical, mechanical, and psychological forces all came together to knock back the market in an abrupt fashion.
The S&P 500 breached its 50-day simple moving average for the first time in five months. Weak-handed investors were consistently shaken out of "buy-the-dip" trades this week, sending stocks, and investor sentiment, even lower.
Congress missed a midnight spending deadline on Thursday--forcing a partial government shutdown--but passed a two-year budget deal a few hours later. The bill will boost spending by approximately $300 billion over the next two years, provide an additional $90 billion for disaster aid, and extend the debt ceiling until 2019.
The increase in spending prompted concerns about fiscal discipline, especially considering debt issuance was already expected to rise due to changes to the U.S. tax code. These concerns kept Treasuries in check and yields at multi-year highs.
However, outflows from the stock market ultimately edged out fiscal concerns, leaving Treasuries modestly higher--and thereby Treasury yields modestly lower--for the week. The benchmark 10-yr yield finished one basis point below the four-year high it touched last Friday at 2.83%.
Meanwhile, the CBOE Volatility Index (VIX), often referred to as the "investor fear gauge," ended the week higher by 66.7% at 28.86.
All 11 S&P 500 sectors finished the week in the red, with losses ranging between 2.8% (utilities) and 8.5% (energy). In general, cyclical sectors--including the heavily-weighted financial sector (-5.8%)--underperformed their countercyclical peers.
The energy sector struggled as West Texas Intermediate crude futures dropped 9.5% to $59.23 per barrel--their lowest level since the end of December.
Overseas, equity markets in Asia and Europe finished the week solidly lower, following Wall Street's lead. China's Shanghai Composite and Hong Kong's Hang Seng led the retreat in Asia, dropping 9.5% apiece, while Germany's DAX and France's CAC set the pace in Europe with losses of 5.3% apiece.
The market still anticipates that the next rate hike will occur at the March FOMC meeting as Fed officials minimized this week's sell off, continuing to emphasize a path of gradual rate increases. The CME FedWatch Tool places the chances of a March rate hike at 71.9%, virtually unchanged from last week's 76.1%.
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