Why Friday's Decline in the Stock Market Isn't a Sign of Things to Come

While the news coverage on Friday was dominated by the 666 point decline in the Dow Jones, we do not see this as a sign of an impending bear market.

There are two primary reasons we remain positive about U.S. equities:

Historical precedent. While it may seem like this kind of decline in the stock market is rare, Friday was the 18th time in the last 25 years we've seen a 500+ point decline1. During that span, the Dow Jones Industrial Average has gone from 3301 to 25,000+; an annual return of 13%. Strong U.S. economic fundamentals. The U.S. economic outlook remains positive; in January the U.S. added 200,000 jobs, unemployment is at 4.1% (the lowest since 2000), and wages were up in January by 2.9% compared with a year earlier - the strongest since 2009 when we were coming out of the recession.

If fundamentals are strong, why did we see a sell off? We believe there are three potential reasons:

Handful of company earnings. Alphabet (Google's parent company), Exxon Mobil, and Chevron announced disappointing results.2 Potential Fed rate hikes. Strong wage and jobs growth, while signs of a strong economy, also signal that the Federal Reserve may increase the Fed funds rate to prevent "overheating" which can contain economic growth. Rising U.S. Treasuries. The yield on the 10-year Treasury increased to 2.8% which makes Treasuries more attractive as an investment than they've been in recent years and likely resulted in some investors selling equities to buy bonds.

While today was challenging, we remain positive about the long-term outlook for the stock market given the economy's strong fundamentals.

James Hickey Chief Investment Officer HD Vest

The views and opinions presented in this article are those of James Hickey and not of H.D. Vest Financial Services® or its subsidiaries. Securities offered through H.D. Vest Investment ServicesSM, Member SIPC, Advisory services offered through H.D. Vest Advisory ServicesSM, 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038 972-870-6000. Investments in individual sectors may be more volatile than investments that diversify across many industry sectors and companies. Certain sectors of the market may expose an investor to more risk than others.

1 Kensho study conducted on February 2, 2018. 2 Based on company fourth quarter earnings vs analyst expectations.