The sell-off that followed the positive January employment report on Friday should not have been a surprise. It was the typical market reaction to strong economic news during the early stages (relatively speaking) of a tightening cycle. Positive economic news could be inflationary and push the Federal Reserve into a more aggressive tightening phase.
The extended sell-off at the end of Friday and into Monday meant there could be more to this. But, still, there’s no need to panic. The stock market has been on an unsustainable path higher since the election, and more broadly for a decade.
A correction was called for, and the sell-off following the positive news was as good as time as any to take profits. After Monday’s market carnage our next target was a standard 10% correction. That hit in both the Dow Jones Industrial Average and the S&P 500 when equities continued to plunge on Tuesday’s open. But once the magical 10% level was hit, equities quickly reversed.
Does this mean it is all over? That is the $64 million question; the answer to which no one yet knows.
In our January 2017 election issue, most analysts expected a sharp sell-off in the case of a surprise Donald Trump victory, followed by a strong market base on tax policy. What they expected to happen over several months appeared to happen in one night. The market appeared to be processing things rapidly. This could be something similar at play. Once traders realized a correction was afoot they wanted it to play quickly. Of course, this still could be something more.
It was not a stretch to think that there would be many buyers ready to step in once the indexes registered a 10% move and that the markets would quickly rebound. But we still don’t really know what set it off in the first place. It will be interesting to see how the rest of the day and week plays out.