It's Never One Thing

We are amused when commentators cite just one factor for a market movement because there's almost always a confluence of factors influencing the markets at any one time.

For the recent correction some are blaming the increased prevalence of passive investing which they suggest has heightened the correlations of stocks and magnified their movements—forced indiscriminate buying on the way up and the opposite on the way down. Others argue that algorithmic trading is to blame.

It didn’t help that congressional leaders reached an agreement that would increase the deficit by well over $500 billion. Or that the market was dealing with a new Fed chair, Jerome Powell, who was sworn in February 5.

After a prolonged period of risk taking, the risk switch was abruptly turned off. Nearly everything was falling in the recent correction. Stocks in general declined, virtually regardless of country or sector. Even utilities and golds, normally counter-cyclical groups, along with most commodities such as oil and gold bullion, selling off too. Correlation of the S&P 500's 11 sectors was recently at its highest level since the fall of '16.

If we were forced to pinpoint the primary impetus for the correction, we'd have to blame the rise in interest rates where the 10-year U.S. Treasury had jumped from a low near 2% last September to just below 3% recently. As rates rise, bonds become a more competitive asset class to stocks. And January’s hourly wage rise was 2.9%, the biggest year-over-year rise since June '09, as the labour market tightened. So, inflationary concerns surfaced impacting anticipation of even higher interest rates.