Stock investors have been on a six-day roller coaster ride with the Dow Jones Industrial Average posting the two worst declines ever in history – a drop of 1,033 on Thursday which followed a 1,175 point drop on Monday. Officially, the Dow is in a correction having dropped over 10% from the high reached in January.
What gives? The U.S. economy is on the upswing with some forecasters predicting 1Q growth of between 4% and 5%. Hiring is brisk with over 2.4 million jobs created since President Trump won the election. Over 300 companies are sharing the benefits of tax reform with employees. And over 3 million workers are receiving a combination of one-time bonus payments in the neighborhood of $1,000, as well as a host of other financial perks such as enhanced paid family leave.
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While an improving economy is positive, it comes with some baggage, and some of that may be fueling the current correction underway in U.S. equities. In turn it can also pave the way for attractive buying opportunities for some of the world’s strongest companies.
1. Billionaires see the value in a correction
Billionaire Mark Cuban, who also owns the Dallas Mavericks, knows a bargain when he sees one. He was buying stocks late Monday, the same day the Dow lost 1,175 points. “I bought some SPX (S&P 500) and my two biggest holdings are Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX). They’ve obviously done well and if they fall anymore I’ll probably buy some calls,” an option bet that a stock will rise, Cuban said during an interview on Fox News’ “Your World with Neil Cavuto.”
Investors still have opportunities. The Dow Jones Industrials entered correction territory on Thursday, falling 10% from its 52-week high of 26616.71 reached on Jan. 26, 2018. With a correction comes buying opportunities. Apple (NASDAQ:AAPL), Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and Alphabet (NASDAQ:GOOGL), parent of Google, are all in correction territory of their own.
2. Stocks are not the economy
“We haven’t had a correction in just about 2 years,” said Brian Wesbury, chief economist at First Trust Advisors. Investors got even more giddy after President Trump cinched the election from Democratic rival Hillary Clinton. The S&P 500 has gone more than 400 trading days without a correction of more than 5% and as of last month the VIX Index, also known as the fear gauge, was hovering near record lows. Since then it has spiked to a level of 33. All that said Westbury also reminds investors the fundamentals remain strong for the U.S. economy.
3. Fed’s balancing act
When Fed Chairman Jerome Powell took the reins from Janet Yellen this month, there was no change to interest rates but policymakers made it clear that future rate hikes are in the cards. “The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate,” the FOMC said in its statement. In December 2017, the Fed said it plans three rate hikes this year. Higher interest rates mean the cost of borrowing will rise. The Fed is also expecting inflation to move higher.
4. Housing hitting the breaks?
The rate on a 30-year mortgage ticked up to 4.32%, the highest level since December 2016, as tracked by Freddie Mac.
Yale economics professor Robert Shiller, one of the nation’s top authorities on the housing market via his Case-Shiller Index which tracks home prices, is worried the days of cheap borrowing costs are over. “Now it’s likely going to be moving into bad territory,” he said during an interview on FOX Business’ “Cavuto: Coast to Coast.” Shiller also notes “substantial inflation” would push mortgage rates even higher. Shiller also won the Nobel prize in economics for analyzing asset prices.
5. Bond yields creep higher
Markets are forward looking and bond yields around the globe are rising in anticipation of improving economies. “The globe is in pretty good shape measured by the number of countries in recession, which is the lowest in history,” Bob Doll, senior portfolio manager and chief investment strategist at Nuveen Asset Management, told FOX Business in January ahead of the World Economic Forum. The yield on the 10-year U.S. treasury rose to 2.88%, a four year high. German bond yields rose to multi-year highs of 0.76%. Two of the world’s largest economies may be on the path to tighter monetary policy.
*This story was updated on 2-9-18.
Suzanne O’Halloran is Managing Editor of FOXBusiness.com and a graduate of Boston College. Follow her on @suzohalloran