Video Length: 00:04:54
What led to the market sell-off?
The starting point for the market shake-up was last Friday, Eitelman said, when January’s employment report showed stronger-than-expected wage growth. The 2.9% pick-up in wage gains—the greatest since 2009—came as a surprise to many investors, Eitelman said, and triggered a sell-off in bonds. To wit, 10-year U.S. Treasury notes have been trading at 2.8% for the past week—the highest level in four years, he said. “These high bond yields quickly became a meaningful headwind for the equity market,” Eitelman explained.
The sell-off was further accentuated by two other factors, in Eitelman’s view: Sentiment and trading strategies. “Ahead of Monday’s plunge, investor sentiment had been getting very optimistic—bordering on euphoric,” he stated—“and this made markets vulnerable to any bad news.” Secondly, the strong performance of markets in 2017 had led to a lot of money and momentum trading strategies, Eitelman said, with many investors betting on a low-volatility environment persisting. “When that turned—when indicators like the CBOE Volatility Index® (VIX) spiked—a lot of individuals were forced to sell at the same time, and that further exacerbated things,” he said.
Are we headed for a recession?
The viewpoint of Eitelman and the team of Russell Investments strategists is that this week’s downturn likely represents a breather for markets, rather than the start of something worse. “A much bigger sell-off—a drop of 20% or more into a bear market—is almost always caused by an economic recession,“ he emphasized. This, however, does not appear to be in the works, in Eitelman’s opinion, as growth data and cyclical fundamentals remain strong and robust. As evidence, he pointed to the J.P.Morgan Global Manufacturing PMI™Index, which came close to an 82-month high this past January.
Leave A Comment