In our annual outlook we were expecting
a 10% downturn at some point in 2018. However, we thought it would
come later in the year as we got closer to the mid-term elections.
Well, here it is. We have not seen this kind of volatility in a while.
See the chart below. As of this morning, we expect the VIX to surpass
50 on the chart below. What does this mean? Simply put, the bull
market is not over. This downturn is much needed and the sell-off is
near its peak. The economy is running well, manufacturing levels are
running great, the consumer is not tired of spending, and everyone
just received a tax cut. These are not indicators of a falling market.
In addition, the majority of companies are beating their estimates,
raising guidance, and giving bonuses to employees. If major
corporations were panicked, they would be hoarding cash, not giving it
So why the drop? Rates have risen too far and too fast. Yesterday, we
finally saw a significant drop in rates. With the 10 year Treasury
yield still ahead of where it was a year ago, the bull market is still
intact. I would be more concerned if the 10 yr Treasury yield were
lower than a year ago, as it may indicate most are worried about the
economy and want the guarantee of the US Government. As we said
before, the biggest risk with the market is rising rates and the Fed.
At this point in time there is still liquidity in the market and this
correction is much needed before the bull market takes the next leg
up. Corporations are going to make more money in 2018 than 2017, and
they are going to spend more which is going to help the consumer. I
would take this opportunity to remind you there has been nearly 100 of
these corrections in the last 100 years. This time is not any