(Friday Market Close) A shave and a haircut of about $2.5 trillion in market value rattled Wall Street in its worst week since 2008, and after-shocks from two 1,000-point earthquakes reverberated Friday. Stocks ended the day on a much more positive note, however, as major averages rallied late and posted solid gains of around 1.5% for the session.
Stocks swung back and forth like a pendulum Friday, with the Dow Jones Industrial Average ($DJI) posting decent early gains before falling 500 points by mid-morning. It then gathered steam into the close, posting a better than 300-point advance by the time 4 p.m. mercifully came around to end the crazy week. It’s worth noting, however, that the closing gain was down from a 500-point advance recorded just a few minutes earlier, possibly a signal that plenty of people remain in the wings ready to sell rallies. That’s something investors might want to keep in mind going into Monday.
The closing hours of the last several sessions have played out like the final minutes of a close game in the NBA Finals, with teams trading leads rapidly back and forth and fortunes sinking or climbing within seconds. It’s not the type of trading environment that necessarily lends a sense of calm like people got used to in the smooth days of 2017, and there’s no telling how long it might continue.
Volatility screamed higher again, reaching 35 on the VIX by late in the day Friday before sinking to just below 30 after stock trading closed. Volatility of this magnitude often punctures many investors’ confidence in the market, making some people reluctant to buy. Once you’ve seen the $DJI tumble 1,000 points twice in the same week — as it did Monday and Thursday — it’s hard to blame anyone for having a lower risk tolerance. Although the past is certainly not a guarantee of the future, history has shown that when volatility climbs suddenly the way it did this week, it can last two to three more weeks, so keep those seat belts strapped.
However, stocks did appear to attract more buying support Friday, and for the first time since Tuesday — which seems like a decade ago — the enthusiasm mostly held into the close. If you’re looking for positives to ponder this weekend, the S&P 500 (SPX) rallied late after falling below its 200-day moving average, the kind of turn-around often seen as a key positive technical indicator. The SPX’s higher close after that stumble could give the market a better technical feeling going into the new week, but in these crazy days, nothing is for certain. Looking at the bigger picture, the SPX ended the week at its late-November levels and is down nearly 9% from the all-time high it posted Jan. 26.
Sector-wise, some of the “defensive” areas of the market built up some gains Friday, with utilities rising 2.2% and telecom up 1.4%. It’s interesting to see these rate-sensitive regions finding buyers, when normally higher interest rates can push them lower. Perhaps in a falling stock market, some people might be looking for cover and for yields. The energy sector got clipped by falling oil prices, but otherwise some of the sectors that did well last year had good performances Friday. Info tech led everything with around a 2.5% gain, and financials climbed nearly 2%. Industrials and materials also gained 1% or more.
Every sector is down over the last five days, with energy the worst of the lot, falling nearly 12%. Utilities, with just a 5.5% drop, represent the best of a sad-looking bunch. Financials and info tech are off nearly 10%.
Looking ahead to the new week, there’s a lot of key data on the way, including the January readings on inflation. The consumer price index (CPI) is due Wednesday, and the producer price index (PPI) comes Thursday. It seems like a lot of the recent anxiety on Wall Street started when January’s non-farm payrolls report delivered a 2.9% year-over-year rise in wages, up from the previous month’s 2.5%. The CPI and PPI reports could help investors determine if these higher wages are starting to filter into the rest of the economy.
The Wall Street Journal reported Friday that U.S. manufacturers and food companies are “grappling” with higher material and ingredient costs on top of pressure from higher wages, calling this “a potential double whammy” that could force them to either raise prices or accept lower profit margins. That pretty much sums up a lot of peoples’ fears in the markets.
A couple of other reports next week work into the same metrics, with retail sales for January on Wednesday potentially delivering insight into consumer behavior and housing starts and building permits Friday perhaps giving a sense of whether higher mortgage rates might be affecting real estate demand. It’s likely investors could keep an extra close eye on all these numbers next week, perhaps playing into market volatility.
Earnings season is on the wane but far from over. A bunch of major companies report next week, including Deere (DE) and CocaCola (KO) on Friday. Investors might want to listen to what executives say on these calls to hear if the stock market plunge had any impact on consumer demand or company financial plans. The other big question to focus on, considering the inflationary fears circulating all around, is whether executives see any pricing pressure due to higher wages.
One thing that might be taking a little pricing pressure off of many companies is the diving oil market. Crude fell below $59 a barrel at times on Friday before settling at $59.20, and had its worst week in two years. Rising U.S. production — which reached a record level above 10 million barrels a day — along with worries about the stock rout possibly eating into demand, probably helped weigh on the entire energy complex. Also, there was a big jump in the number of rigs drilling for oil in the U.S. last week, and Iran made noise about possibly raising production.
Many investors kept a close eye on the 10-year Treasury yield all week, and there really wasn’t much relief as of late Friday. Yields stayed about flat at close to 2.85%, down from the 2.885% recorded Monday but still near four-year highs. Some analysts told the media Friday that they’d expected yields to test 3% at some point this year, but not this soon. That was similar to what people have said about the current stock market correction: It wasn’t unexpected, but few if any thought it could happen in a 72-hour period.
This is a correction, not a bear market. The textbook definition of a bear market is a 20% drop from a market high. But from an investing standpoint, bull and bear markets may be all about your perspective. In a bull market, any downturn is often seen as an opportunity to hunt for bargains. As such, many down days see a bounce from the bottom and a rally to a new high.
In a bear market, an up day may be seen as an opportunity to lighten the load and, as such, rallies tend to fizzle. We've seen several rallies fade this week, but the action late Friday seemed to have sellers on their heels, at least temporarily. The question is whether this can translate to higher confidence early in the new week, but everyone will have to wait to find out.
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