As we entered 2018, markets continued to eclipse historical milestones. The S&P 500 posted one of its best ever starts to a year hitting an all-time high on January 26th. A few short days later investors were reminded that after a long period of calm, markets can go down as well as up. The sudden market sell-off has been blamed on positive wage growth of 2.9% year-over year, which was the fastest rate since 2009. The fear is that rising wages might be an indication of increasing inflation that could prompt the Federal Reserve to raise interest rates more quickly than expected, which could be negative for stocks. Even though inflation remains benign, yields on the 10-year US Treasury jumped to 2.85%, the highest close in four years. Thus, the concern is that higher yields will hurt stocks. Stocks might fall further before stabilizing but overall global economic growth and corporate earnings look better than they have in years.
Advancing stock prices across the globe added more than $9 trillion in market value to equity markets in 2017, the biggest one-year advance since the financial crisis. Improving economic growth and strengthening corporate profits influenced investors to buy. At the same time central bankers across the globe mostly kept their economic stimulus measures in place. These efforts have kept interest rates low and diminished the payout available for bonds, encouraging investors to own stocks even as equity valuations notch higher.
