U.S. equity markets, as measured by the S&P 500, suffered their worst week since January 2016. On Thursday, the S&P 500 officially entered correction territory—down 10% or more from prior high—having fallen -10.2% from its record high set on January 26. A subsequent rebound on Friday left the S&P 500 down -8.8%. Whether or not the index re-tests its Thursday lows remains to be seen. According to Goldman Sachs, the average correction experiences a -13% sell-off over the course of four months and then takes four months to recover.

Fears of higher inflation were identified as the primary culprit for the initial sell-off. However, several other factors seemed to play a role. Specifically, volatility-linked investments designed to profit when volatility falls received considerable attention. In 2017, these products generated outsized returns as volatility languished, leading to significant investor inflows. On Monday, when the S&P 500 fell by more than 4% and volatility spiked 115%, the two largest exchange-traded products that shorted volatility each fell by ~90%, losing a collective $3B in the process. While significant in absolute terms, the $3B was minuscule compared to the nearly $2.5T the S&P 500 has lost since late January. However, the funds were reflective of the broader short-volatility trade taking place in the markets. When volatility spiked, those trades were quickly unwound, thereby exacerbating volatility, and thus the broader selloff.

Another factor at work seemed to be growing concerns about ballooning budget deficits which will require the U.S. in 2018 to sell the most amount of debt since 2010. At the same time, the U.S. Federal Reserve is reducing its purchases of government debt. As a result, rates may need to move higher in order to entice buyers. More government debt and higher rates would likely have a dampening effect on economic growth.

Through Friday, 68% of S&P 500 companies had reported 4Q earnings. To date, 74% and 79% of companies that have reported have beaten their earnings and sales estimate, respectively. Full-quarter earnings growth is currently estimated at 14%.