It has been nice to have 13 consecutive months without a decline in market indexes. We know it is uncomfortable when the market drops. On Monday (2/5/18), we saw the computers trigger heavy selling when the S&P 500 dropped below its 50-day moving average. Many computers were surely set with sell-stops at that level – and the decline accelerated from there. Panicky sellers jumped in throughout the day and we may see some more selling early this morning. One never knows precisely when the selling will stop, but we expect there is a good chance it ends today. Several of our short-term market indicators are at extreme levels; we have found it best to use tools like these during extreme volatility. They help us see more clearly through the fog of emotional and machine-driven selling. In the end, we think this corrective episode will provide us opportunities to buy companies at attractive prices over the next several days and weeks.
This is not 2000, nor is it 2008. We see no macro-economic imbalances that would cause us to change our intermediate macro-economic view of growth over the next 24 months. Hype in crypto-currencies does not constitute a major macro-economic imbalance, in our view.
What we do know is that this drop has been driven primarily by technical factors, not fundamental, macro-economic ones. Inflation and interest rates are still low. Most wage inflation in the January number was at the low to middle-income level, where many companies, in response to lower taxes, have raised their minimum wages and given bonuses. That is good. We want the lowest incomes to rise – it is good for them and good for the economy. Higher wages only cause overall inflation if we do not have corresponding productivity gains, but corporations are already investing much of their repatriated and tax savings dollars. Capital expenditures are rising rapidly, and much of that is directed at increased productivity.
Further, earnings & sales are rising and lower taxes will flow through to drive further earnings gains. We maintain a target of 3100 on the S&P 500 for year-end 2018.
February 6, 2018