CWS Market Review – February 5, 2018

Well, today was certainly an eventful day on Wall Street. That’s why I wanted to send you an update to fill you in on today’s action.

Let’s start with the important news—there’s no reason to make any change to our strategy. There’s no reason to get scared and sell. Our Buy List is just fine. In fact, we outperformed the market by a good margin today (meaning, we were down less than everybody else).

One of our Buy List stocks, Church & Dwight (CHD), had a good earnings report this morning, plus they raised their dividend. CHD was one of only two stocks in the entire S&P 500 that closed higher today. Seventeen of our 25 stocks beat the S&P 500 today. When folks get scared, they seek out quality and that’s what we have.

Now let’s look at some of today’s damage. It ain’t pretty. The Dow Jones Industrial Average plunged 1,175 points—its greatest single-day point loss in history.

It was a slow build. By 2 pm, the Dow had lost about 330 points, which was making for a bad day, but it was nothing too serious. After that, things got very rough. Over the next hour, the Dow shed an additional 470 points, but that was only the beginning. In the next 10 minutes, the Dow dropped another 700 points.

At its lowest, the Dow was down 1,597.08 points. The previous record point loss was 777 points, so we were more than twice that (I’m talking about points, not percent). The NYSE employs a “circuit breaker” where trading shuts down for 15 minutes if the Dow loses 7%. That would have been about 1,800 points today, so we didn’t hit it.

By the closing bell, the Dow had lost 1,175.21 for a loss of 4.60%. That was more than the entire Dow was worth in 1984. The S&P 500 lost 113.19, also its greatest point loss ever, for a drop of 4.10%. (Note the unusually wide spread between the two indexes. That was due to a bad day for Boeing. Personally, I prefer the S&P 500.) The S&P 500 also easily dropped below its 50-day moving average. The index hasn’t traded below its 50-DMA since August.

I’ve been talking about points, but was this the worst day in percentage terms? Please—not even close! In the last decade, this was the S&P 500’s 25th worst day. To be precise, today wasn’t the weird thing. The truly weird thing was the ultra-low-volatility rally that preceded today. Today isn’t unprecedented. The couple of months leading up to today were.

In the last several newsletters, I’ve passed along several stats of us going so many days without a 1% drop or consecutive days closing within 3% or 5% of an all-time high. All those stats reflected one thing: our low-vol rally. Now, normal market behavior is returning. The VIX rose 115% today. That’s something you don’t see every day!

Let’s add some context. Even with today’s loss, the S&P 500 is still up 7% since Labor Day. For the year, the S&P 500 is down a little less than 1%.

The natural reaction is to ask, “what happened today?” It’s frustrating to say this, but this is what markets do. Every so often, things just freak the hell out. We think, X happened, therefore, what caused X? Sometimes, X just is.

There are a few items I can point to, but who knows how large a role they played. For example, this was Jay Powell’s first day as Fed chair. Greenspan started on the job a few weeks before the 1987 crash. It’s not rational but markets aren’t wild about change.

I was particularly struck by some activity in the Fed funds futures market. The futures started to signal that a fourth rate hike could be possible this year. That’s surprising. I believe the odds got up to about 26%, so possible but not probable. Either way, that’s unexpected and that could have helped freak the market out. The very strong ISM Non-Manufacturing report this morning may have given the rate hawks more confidence.

Our Buy List was down today but by a lot less than the S&P 500. For the day, our Buy List fell 3.44% which means we outperformed by 66 basis points. Church & Dwight (CHD) had a very good earnings report, plus they raised their dividend. CHD was one of only two stocks in the S&P 500 that closed higher today.

There’s not much more to say right now. Expect more volatility. We have a bunch more earnings reports coming this week. Cerner (CERN) and Becton, Dickinson (BDX) report tomorrow. I’ll have more in this week’s newsletter. I usually open with a quote, but this time I’ll close with one of my favorites from Peter Lynch: “The real key to making money in stocks is not to get scared out of them.”

– Eddy

Posted by on February 5th, 2018 at 10:47 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.