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February 02, 2018 at 10:54 AM
They’ve faced threats before: swollen valuations, a stagnating economy, stretches of declining earnings. Now investors are dealing with a new menace, and it’s wreaking more havoc than anything in a year.
It’s the bond market, where the biggest jump for interest rates since March has bulls questioning the staying power of an equity advance now seven months from being the longest ever. So drastic is the runup in yields that it’s knocking stocks down during a period when analysts are pushing up earnings estimates four times faster than any time since 2012.
Looking at the week’s drumbeat, you can’t help but wonder, is this the start of something big? Warnings about valuations have been pouring forth from bears for so long that barely anyone listens anymore. With the S&P 500 up almost 50% in less than two years, some see the end of the blissfully easy money equities spewed out for 13 straight months.
“It’s the turning point of volatility,” said Jeffrey Schulze, chief investment strategist at Clearbridge Investments, which manages $137 billion. “We were all very fortunate to go through a year like 2017. But there’s a number of different dynamics this year that will make volatility more part of the equation than it has been in quite some time.”
“But it’s definitely not the end of the bull market,” Schulze said. “In order to see the end of the bull market, you need to see the U.S. go into a recession. We have an economic dashboard at Clearbridge, 12 variables that have done a very good job of foreshadowing an economic downturn. Out of the 12 variables, only one of them is flashing any type of caution.”
The most significant feature of this selloff has been its breadth. While past declines in the U.S. stock market have been notable for their narrowness — when one industry fell, another rose — this time there’s been no cushion. All 11 industries in the S&P 500 declined in the last week, something that hasn’t happened since the month of Donald Trump’s election.
Selling has also been spread among asset classes. A simple comparison that adds up percentage losses in the SPDR S&P 500 ETF and iShares 20+ Year Treasury Bond ETF showed a concerted selloff that was the worst since March 2015, when better-than-expected jobs data stoked rate-hike speculation.
