Is Last Week’s Drop the Beginning of More Pain for Stocks?

Friday’s sharp decline in the S&P 500 Index, which capped off a week that saw it drop 3.8%, might have led us to forget that just a few days ago many claimed the stock market was melting up; a reasonable characterization. Concerns have quickly turned to whether last week’s selloff is the start of something much bigger–dare we say a meltdown.

While there is no standard definition of a melt-up, our friends at Strategas Research Partners have defined it as a top five percentile, six-month rally in the S&P 500 Index when the index is at new highs. Based on this definition, stocks came up about 5% short at the January 26 high when the six-month gain in the index reached 16%. Even if stocks did melt up, history indicates they generally do pretty well subsequently, as we discuss in our latest Weekly Market Commentary due out later today.

As for whether stocks are poised for a melt-down, we say no. According to LPL Chief Investment Strategist John Lynch, “We do not see the makings of a significant stock market top or major downturn and continue to believe stocks are well supported by fundamentals.” LPL Research believes the latest downdraft is more likely to be a buy-the-dip opportunity rather than the start of a significant selloff.

Finally, with regard to the latest jump in interest rates, the 10-year Treasury yield remains historically low and well within our 2.75-3.25% year-end forecast. The roughly half-percent jump in rates over the past three months is still well short of the 1% 90-day moves in 2013 (the “taper tantrum”) and 2016 (presidential election). We see further gains for stocks over the remainder of 2018 and maintain our fair value S&P 500 range of 2850–2900. Please see the Outlook 2018: Return of the Business Cycle publication for additional description and disclosure.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial LLC.

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