Market volatility for stocks and bonds over the past several weeks and months has pretty much been “north”. However, when stocks and bonds together increase in value over time, one has to expect a time when both asset classes will decrease in value. Last week was definitely one of those times.
Is it a Market Pull-Back or a Correction?
Most describe a correction as a 10% drop in market value. Will this happen? Only time will tell. What adds to the drama is the fact that a 200 point increase or decrease in the daily value of the Dow Jones Industrial Average is insignificant compared to the relevant value 200 points had approximately 5 years ago. On December 31, 2012, the Dow finished the year at approximately 13,104 compared to Dow 25,000+ as of this writing. You can do the math!
Is it Over-Valuation?
Again, only time will tell. If we are in a 3% plus GDP economy going forward, perhaps the stock market as a whole if fairly valued. If that is true, a market pullback or correction tends to be an opportune time to add to equities if you are underinvested in that asset class. Keep in mind; earnings appear good as companies are making money as consumers are spending it.
Watch Interest Rates!!
As all of you know, I do not make any market or economic predictions. Interest rates however, are definitely worth keeping a close eye on. Market interest rates such as the U.S. 10 and 30 Year Treasuries have proceeded higher so far this year. In my opinion, this has at least some reason for the markets to be down last week. I would keep an eye on how much higher the U.S. 10 Treasury moves. Interest rates will impact both the economy and the securities markets in either direction. Can the economy continue to expand with a 3%+ 10 U.S. Treasury?
Again, only time will tell.