This has been a very rough week. Monday in particular saw the worst one-day percentage drop for the S&P 500 since 2011 when the euro zone debt crisis rattled markets. Compared to the general lack of volatility in recent times, the week feels especially jarring.

Last Friday’s monthly jobs report revealed that January wages had grown almost 3% year over year, faster than expected. The reading sparked fears that inflation could accelerate and cause the Fed to tighten monetary policy more aggressively than believed. Comments from some Fed officials suggested that the path of interest rate hikes could steepened further fueled the fear. Bond yields jumped and the VIX—the so-called Fear Index—had its largest ever one-day percentage jump.

More Likely a Correction Than Fundamental Deterioration

However, this looks to us more like an overdue correction rather than the start of a bear market. Typically, the market doesn’t enter bear market territory unless a recession was around the corner.

It is true that the stock market has correctly predicted recessions before, but it also often jumps the gun and drops without a recession. Nobel Prize winning economist Paul Samuelson once famously quipped that the stock market has forecast nine of the last five recessions.

Current economic indicators look good and corporate earnings growth will likely accelerate. It doesn’t mean that a recession won’t eventually arrive in the next few years, but a chance of a recession occurring in the next twelve months is quite low.

Moreover, the Fed does not act in a vacuum. Volatility in the stock market could cause it to slow its plans to tighten. If oil prices were in the $80s, we’d be far more concerned because it would be more difficult for the Fed to respond. Higher energy costs is a contractionary event, and if the Fed were to tighten to combat rising prices, it would squeeze the economy.

Sudden selloffs have happened before and will happen again. We think the best thing to do at this point is to not panic. As of Thursday’s close, the S&P 500 has pulled back 10% from its closing high on January 26. This doesn’t automatically mean the correction or volatility is over, but we expect things to start to stabilize soon.

A Strong Quarter and Upbeat Outlook

Republic Services (NYSE: RSG) reported quarterly results yesterday. Revenue in the fourth quarter grew 7.6% year-over-year to $2.56 billion. Earnings per share (adjusted for unusual items) increased 7% to $0.61. The company benefited from higher prices and volumes and lower taxes during the quarter. Average realized prices improved 2.4% while volume increased 2.7%.

Revenue for the full year eclipsed $10 billion for the first time in company history. Adjusted EPS grew 9.5% to $2.43, above the company’s guidance range of $2.36 to $2.39. Tax benefits contributed $0.03 per share to earnings. Thus, even without the assist from lower taxes, Republic would have exceeded its guidance range.

Looking ahead to 2018, Republic forecasts EPS to be in the range of $3.05 to $3.10, an increase of 26.5% at the midpoint. It expects adjusted free cash flow to increase by 18% to about $1.1 billion, which bodes well for continued return of cash to shareholders. The latest guidance is well above what the company had previously said last quarter.

The company continues to be a steady source of income for investors. Republic returned $1.1 billion to shareholders in the form of dividend and share purchases in 2017 and expects the amount to increase to $1.2 billion this year.

Upgrade Helps AAR

AAR Corporation (NYSE: AIR) jumped after receiving an upgrade from an analyst at Canacord. He raised his target price for AIR to $48. Although our strategy does not depend on sell-side analysts, we welcome any actions that helps our recommended stock. Our current suggested buy-up-to price for AIR is $45.

The stock was up over 10% for much of the day yesterday. Unfortunately it was not spared in the market afternoon selloff and ended the day up just 2.6%. 

(For those who have not read the special report describing the strategy behind Brain Trust Profits and the difference between buy side and sell side analysts, you can view the report here.)