The global selloff continued on the open Monday after the DOW and S&P 500 both saw their worst days in two years. After the first hour of trading however, markets have rebounded to be flat or positive on the day. Still, they have a long way to go, the DOW in particular, after its 666-point selloff on Friday.
It is not uncommon to see short term bounces within broad selloffs as traders look to take profits as markets become oversold. RSI charts across different time periods are a good way to view the severity of a selloff in relative terms. While this may feel like a large drop, it is small in comparison when looking at a weekly (ES) E-mini S&P 500 chart.
The recent downdraft was sparked by fears of inflation and the potential for the Fed to hike interest rates four times in 2018. Inflation woes came in after the Labor Department reported the best wage growth in 10 years with 200,000 new job additions.
A potential 100 basis points bump, up from the expected 75 basis point increase, isn’t all doom and gloom. A four-tiered rate hike throughout the year would somewhat normalize rates which have been at historical lows since the 2008 financial crisis. The low rate environment has forced investors into risk i.e. the stock market, in an attempt to get a return on investment. This influx of buyers sparked the markets nearly 10-year bullish run.
Should interest rates continue to rise the so does the likelihood of investors moving assets back into the bonds market, which could trigger some additional market pullbacks and ultimately be very healthy for the market. Looking ahead, the fundamentals suggest the probability of a “market crash” remains fairly low in such a robust economy and strong labor force.
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