Strong jobs and wage growth data triggered a sharp drop – extending concerns from earlier in the week that inflation is on the horizon. Wage growth over the past twelve months hit 2.9% in January – a clear sign that a tight job market is boosting incomes. This welcome news, however, gives the Fed additional reasons for more tightening. While the Federal Open Market Committee met this week without taking action, it is anticipated that the committee – now under Powell’s leadership – will continue the rate increases that began under Yellen’s term. The market volatility overshadowed Trump’s first State of Union address and the release of a controversial GOP memo alleging FBI overreach.
The drop in stocks needs to be considered in the context of year-to-date returns that were extraordinary. Including the decline, the S&P 500 is up 3.2% year-to-date and 23.3% over the past year. Within the indexes, there was quite a bit of volatility as earnings reports rolled in. Tech stocks were hit and Apple is now down 10% from its high. Healthcare stocks also dropped earlier in the week as Amazon announced a desire to lead a joint effort to lower healthcare costs. Bond prices, impacted by higher yields are in negative territory for the year. The downside for bonds is limited, however, and investors will need to continue rely on this asset class for income and to limit downside risk.