Last Week's Market Drop
October 15, 2018
Bull and Bear — Fishers, IN — Norwood Economics

Is the drop meaningful?


The stock market dropped about 7% from its most recent record close September 20th to its most recent short-term low of 2728 last Thursday September 11th. As declines go, it was not at all out of the ordinary, except perhaps by the standards of the current bull market, which has seen long periods during which even declines of a few percent have come few and far between. Is the drop meaningful? No one knows, although many may claim they do. What caused investors to start selling? The most common explanations are that interest rates finally got their attention, as did the tariff war with China. 


But why Wednesday the 10th and not Wednesday the 3rd? The truth is that no one really knows how to model the behavior of crowds, and no one really knows what the catalyst for a sell-off will be before the fact. Oh sure, we can point to the Federal Reserve increasing the cost of money as the great killer of bull markets, but we have no real precise estimate of the timing. (Currently I’m forecasting a 70% chance of a recession beginning in the second half of 2019, or first half of 2020, which means that last week’s “oopsie” could actually be the start of a bear market.) After all, bear markets tend to lead a recession by two to three quarters. However, it’s also quite possible that the next bear market doesn’t start for a few more years. Is my forecast useful to anyone? Well, it’s useful to someone approaching retirement, someone with spending plans in the next three to five years that could be threatened by a bear market in the interim.


Should you worry? Only if your portfolio allocation is too aggressive for your spending goals. Meaning what? Meaning that your financial goals should inform your portfolio allocation decisions. It’s called asset/liability matching in the institutional world, also liability driven investing, or LDI. Your spending goals are no different. Your job is to manage your investment portfolio in a manner that allows you to pay all of your unfunded liabilities (financial goals) on time and in full. Don’t have a spending goal within the next ten years? Don’t worry about the next bear market. Plan on retiring in the next five years? Take a good look at your current portfolio and make sure you can still meet that very important goal on time.


Now back to last week: The S&P 500 will fall 30% to 50%-ish at some point. It’s guaranteed. The question is, when? Call it 95% likely in the next two to three years. Make it equally likely that the S&P 500 will lose money over the next three to four years. Doesn’t work for your spending goals? Make some changes to your portfolio.


Christopher R. Norwood, CFA

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Executive Summary The S&P 500 rose 3.4% last week, climbing to 6,173.07 The Magnificent 7 are outperforming the S&P 493 by over 18% since April The Cboe Volatility Index (VIX) fell as low as 16.11 last week Investors seem unconcerned about tariffs and war Treasury interest rates are starting to fall The Fed has little reason to cut if unemployment isn't moving higher The stock market is at record highs Corporate bond spreads are tight, meaning credit is abundant The dollar has fallen by around 10% in 2025 Inflation is expected to move higher because of tariff The Stock Market The S&P 500 rose 3.4% last week. The Israeli-Iranian ceasefire was credited with the surge to the upside. The index had lost 0.7% over the prior two weeks.
By Christopher Norwood June 23, 2025
Executive Summary The S&P 500 gained 0.3% last week, climbing to 5,967.84 The index is having trouble staying above 6,000 Technical indicators are turning somewhat negative The Federal Reserve kept the overnight rate at 4.25% - 4.50% The updated “dot plot” shows a divided Fed Seven members indicate no rate cuts in 2025 Eight members forecast two rate cuts in 2025 The Fed is forecasting a slower economy in 2025 and 2026 The hard data is starting to point to a slowing economy Inflation is still well above the Fed’s 2% target
By Christopher Norwood June 16, 2025
Executive Summary The S&P 500 fell 0.4% last week to finish at 5,976.97 Friday's sell-off due to Israel's attack on Iran The Volatility Index (VIX) is rising due to the war in the Middle East Higher volatility is usually associated with a down move in the market There is no chance of a Fed Funds Rate cut at this week’s meeting according to the CME FedWatch Tool The unemployment rate has been rising slowly The dollar continues to weaken The U.S. needs to reduce its spending to avoid a currency crisis  The Stock Market
By Christopher Norwood June 9, 2025
Executive Summary The S&P 500 rose 1.5% last week to finish at 6,000.36 The May payroll number came in above estimates The U.S. economy is slowing, despite the S&P 500 poking above 6,000 The Labor Force Participation Rate fell to 62.4% from 62.6% Inflation may have bottomed and is set to rise The services price paid index is pointing towards a higher CPI The declining dollar is a concern Tariffs are a tax The Q2 nowcast seems to be indicating that negative economic impacts from tariffs won’t affect Q2 International markets have far outperformed U.S. markets so far in 2025 The Stock Market The S&P 500 climbed 1.5% last week and closed at 6,000.36. The Dow rose 1.3% while the Nasdaq rose 2.0%. Interest rates rose as bond prices fell. A stronger-than-expected jobs report on Friday is getting the blame for rising yields. The jobs report was also responsible for the S&P’s gap-up open on Friday (chart below).
By Christopher Norwood June 2, 2025
Executive Summary The S&P 500 rose 1.9% last week to finish at 5911.69 The S&P 500 rose 6%, the Dow rose 3.8% and the Nasdaq climbed nearly10% in May Could see another test of support around 5,800 this week Several longer-term negative divergences may be pointing to a tough summer Declining new highs during an advancing market is a negative Earnings estimates for 2025 and 2026 have been trending lower Earnings drive the stock market over the long run
By Christopher Norwood June 2, 2025
Executive Summary The S&P 500 fell 2.6% last week to close at 5,802.82. The 20-Year Treasury auction went poorly. The yield rose above 5%. The 5% threshold has twice this year resulted in the administration adjusting its stance on tariffs. (Make that three times as Trump over the weekend gives the U.K. until July 9 th .) Longer-term inflation expectations are rising. Moody’s downgraded the U.S. to Aa1 on 16 May. The credit default swaps market sees the U.S. as a Baa1/BBB+ credit, on par with Greece. The tax cut bill will add to the deficits and debt. Long-term interest rates might well continue to rise.
By Christopher Norwood May 19, 2025
Executive Summary The S&P 500 rose 5.3% last week to finish at 5,958.38 The Dow advanced 3.4% and the Nasdaq added 7.2% A falling VIX means investor confidence is increasing A 90-day pause in the trade war sent the S&P higher Earnings estimates are falling along with GDP growth forecasts Earnings and interest rates drive the stock market over the long run Investors are chasing performance Small business hiring plans and job openings haven’t improved Norwood Economics continues to look for good companies on sale The Stock Market
By Christopher Norwood May 19, 2025
Executive Summary The S&P 500 fell 0.5%, to finish at 5,659.91 The Dow fell 0.3%, and the Nasdaq dropped 0.5% The 200-day moving average is the next resistance U.S. nominal GDP growth expected to slow significantly Bank of America shifts investment focus Norwood Economics already has exposure to gold for most clients Norwood Economics is overweight international stocks The risk of both higher unemployment and higher inflation has increased The Federal Reserve declined to lower the fed funds rate last week The Stock Market
By Christopher Norwood May 5, 2025
Executive Summary The S&P 500 rose 2.9% last week to finish at 5,686.67 The Dow was up 3% last week, and the Nasdaq rose 3.4% The counter-trend rally is ongoing Investors are extremely bearish due to worries about the trade war Political prediction markets are back Exploding imports are not a sign of weakening demand The April jobs report was better than expected The Trade War continues Capital is flowing into international and emerging markets The US dollar will likely continue to weaken The Stock Market
By Christopher Norwood April 28, 2025
Executive Summary The S&P 500 rose 4.6% last week and finished at 5,525.21 Dollar weakness is an unpleasant surprise Tariffs and the dollar's safe-haven status should have pushed the dollar higher The S&P managed to retake the 20-day moving average Investors are looking for a reason to buy Some strategists are advising to sell the bounce Negative supply shocks are bad for the economy Weakness in U.S. bonds, stocks, and the dollar has investors scared Data is beginning to point to an economic slowdown The Chicago Fed National Activity Index (CFNAI) is one of the most important and overlooked economic indicators The Stock Market The S&P 500 rose 4.6% last week and finished at 5,525.21. The Dow rose 2.5% and the Nasdaq gained 6.7%. The S&P’s gains were attributed to President Trump’s statements at a Tuesday press conference. He said that Chinese tariffs would come down, and he wouldn’t fire Fed Chairman Jerome Powell. The 10-year Treasury yield ended the week at 4.25%. The two-year Treasury yield finished at 3.79%. The dollar rebounded. The dollar index (DXY) ended the week at 99.587. It hit a 3-year low of 97.921 on Monday. The DXY has lost 9.6% since mid-January. Tariffs and the dollar's safe-haven status should have pushed the dollar higher, not lower. It is believed that foreigners are repatriating their money. America needs foreign capital. Interest rates will have to go higher to entice foreign capital to our shores if safe-haven status is lost.
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