Market Commentary - February 9th, 2018

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The decline of the past two weeks has been just as breathtaking as the rally that preceded it, and we're still looking for the one big fundamental event that sparked it. Equity markets entered formal correction territory on Thursday, generally accepted as a price decline more than 10%.
Investors are grappling with a hawkish Fed, rising interest rates, and surging volatility, the latter likely the primary culprit behind the swift and significant technical selling pressures since late January. While rates, inflation, and Fed policy remain a tangible concern looking forward, given the constructive economic and fundamental backdrop, we view this bout of volatility as more technical in nature than a vote of global economic pessimism.
Equity volatility surged 180% on Tuesday, to 49.21, its highest level since 2011 and a dramatic shift from the 11.09 average level in 2017. The volatility spike triggered selling by many computerized trading strategies, exacerbating the market moves, reminiscent of the 'flash crash' of 2010 and black Monday of 1987, albeit a mini black Monday in comparison.
Thursday ended a 715-day streak since the last 10% correction, cracking the top ten longest periods without a correction. The pullback also ended a record of 448 days without a -3% move and the second longest streak on record of 578 days without a -5% move.
Historically, equity markets experience corrections every 16-17 months. Since 2009, the S&P 500 has experienced four corrections: a 16% decline in 2010, a 19% decline in 2011, a 12% decline in 2015, and a 14% decline in 2016.
In the 7 occasions where the S&P 500 has gone from extreme overbought (2 standard deviations above 50 dma) to the inverse extreme oversold in less than two weeks, the ensuing 1, 3, and 6-month forward returns have been positive 71%, 100%, and 86% of the time.
High yield bonds were victims of technical selling pressure in the risk off environment as well. Last week saw the 20-day net flows jump to over $5b, with spreads widening over 20 bps.
The bright side of the correction is the market is no longer at extreme valuations, particularly given the earnings growth trajectory. In the past two weeks, the P/E multiple on the S&P 500 has fallen from over 23x to 20.6x, a one-year low valuation.
Blended S&P 500 earnings growth is registering 14% growth, the third time of the past four quarters we've had double digit earnings growth.
The spread between companies raising versus lowering guidance is +5.4, the most positive guidance measure from Bespoke since they started tallying the data in 2001.
European PMI in January revealed accelerating economic momentum with the service sector growing at its fastest pace since 2007.
With mixed support and only a brief U.S. government shutdown, lawmakers approved a massive $400mm budget deal, breaking through spending caps, increasing spending, and suspending the debt ceiling until 2019.
The BoJ moved swiftly on Friday to curb a rise in bond yields, offering "unlimited" buying in long-term Japanese government bonds. On top of that, the BOJ increased the amount of its planned buying in five- to 10-year JGBs to
𨙊b from the 𨘢b it has favored since late August.
ISM non-manufacturing survey surged higher to 59.9, a 96th consecutive month of expansion. New orders posted the strongest reading since 2011 and the employment reading broke out to a new record high.
A 153rd consecutive week of sub-300,000 job losses has taken the 4-week average of 224,500 down to a level not seen since 1973, a new 45 year low.
After 11 consecutive weekly declines, crude oil inventories increased for the second week in a row. Demand remained steady and inventories now stand -17% below this week last year.