Early last week, stocks dropped sharply lower before rallying toward the end of the week. The reason was a surge in inflation at the consumer level that was the biggest increase since 2008. The 4.2% rise in the Consumer Price Index for the 12 month period ending April rattled markets as investors worry over runaway inflation derailing the bull market.
Last Monday we saw the S&P 500 close at a new all-time high. That was followed on Tuesday by the equal-weighted S&P 500 and the DJIA (Dow Jones Industrial Average) hitting new highs. On Wednesday however, the DJIA dropped 681 points as those inflation concerns mounted. The Chicago Board of Options Exchange’s volatility index, known as the VIX, shot up 26% highlighting the sharp pullback. By Friday, investors waded back into stocks and the major indices managed to recoup most of the losses.
During times like this, I always field several calls from clients who are understandably concerned about market conditions. The first thing I tell them is that on average, the market will experience a pullback of about 10% at least once a year. We haven’t seen anything close to that since March 2020 when the pandemic’s effects were just being felt and the DJIA dropped about 37% over a couple of weeks. The second thing I tell them is to put the current pullback into perspective. There is no better way to do that than look at one of our favorite charts. The one below from Dorsey Wright & Associates is of the S&P 500. You can see the column of X’s on the right side of the chart. This is the bounce back at the end of last week. The column of 0’s directly to the left of the X’s is the pullback last Wednesday.
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The market doesn’t move up in a straight line (or down for that matter). When we are in an overall strong up market like we have been since 2009, there are “pauses” where the market takes a breather. We call these “healthy pullbacks” as the market digests its gains up to that point before proceeding back upwards in an orderly fashion. What we experienced last March is known as a “Black Swan” event. These are once-in-a-lifetime occurrences. Even with that severe pullback, the market rebounded and never looked back.
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If you have any questions, please contact me.
The Markets and Economy
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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Consult your financial professional before making any investment decision. You cannot invest directly in an index. Past performance does not guarantee future results.
Note: All figures exclude reinvested dividends (if any). Sources: Bloomberg, Dorsey Wright & Associates, Inc. and The Wall Street Journal. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
Securities offered through Triad Advisors, member FINRA/SIPC. Investment advice offered through Resources Investment Advisors, LLC, an SEC-registered investment adviser. Resources Investment Advisors. LLC and Vertical Financial Group are not affiliated with Triad Advisors.
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