FOCUS, Money:  Making sense of what’s happening with the stock market

By Kyra Morris, contributing editor  |  Snap!  Thus ended the S&P 500’s longest streak in history without a pullback of at least 3 percent.  The major U.S. stock indexes capped off their worst weekly performance in two years on Feb. 2 following a steep sell-off. The Dow and S&P 500 pulled back 4.1 percent and 3.9 percent, respectively. The Nasdaq lost 3.53 percent.   It happened quickly.  What changed?

January began the year with gains in every major index, catapulting investors into record highs.  The DOW and the S&P 500 had their best monthly gains since March 2016, and the Nasdaq experienced its biggest one month gain since October 2015.  The news was good.

Equities benefited from strong economic data and solid corporate earnings growth at the start of the year. The American economy added 200,000 more jobs.  This was higher than expected, leaving the U.S. jobless rate at 4.1 percent, the lowest since 2000.  Eighteen states began the year with higher minimum wages.  Some companies recently announced bonuses following the generous reduction in U.S. corporate tax rates.   At the same time, government statistics show a resurgence in factory activity, and a rebound in housing.

Could all this good news be too good?  If American workers are getting paid more, then companies might start charging more for whatever they produce or do.  This might raise inflation.  The 4.1 percent jobless rate might bring us closer to the “maximum unemployment” point.  This is the very illusive point where companies have trouble filling jobs, and therefore might have to raise wages.  This might raise inflation.

To offset the momentum of good news and stave off inflation concerns, there was a noticeable increase in interest rates recently.  This is what appears to have rattled Wall Street.  Although, an interest rate rise is the normal and expected response, it is a difficult reality.  Record-low interest rates propelled the stock market and the economy for nearly nine years.  It appears to be a Catch-22.  As the job market and economy gain a solid foundation, interest rates rise to slow it down.

It is not unusual for the stock market to pull back during interest rate increases.  Also, periodic market drops normally occur roughly once a year. They are viewed as healthy because they clean things out and help curtail overly exuberant investment markets.  However, the U.S. financial market hasn’t suffered a setback as big since February 2016. In fact, the market hasn’t suffered a 5 percent drop, or pullback, since June 2016, when England’s Brexit vote to leave the European Union shocked investors.

The S&P 500 went 448 days without a decline of 3 percent, according to Bespoke Investment Group.  This is the longest streak in history.  While this record is broken, last week may not actually be the beginning of a 10 percent to 20 percent decline signaling a recession.  The overall good news is still there.  Solid earnings exist in every sector. The tax break provides government stimulus. Jobs and wages are up, and so are manufacturing and housing.  Perhaps there may be a rose -colored tint to the glass, and this may actually be the beginning of a buying opportunity?

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