It would appear that after more than six years of a bull stock market, a 200% gain for the S&P 500, the bears are hungry. They have numerous reasons to be bearish – a sub-par global growth environment, manufactured earnings (with aggressive share buybacks and M&A supporting the bottom line), and high valuations by a variety of measures.
The Fed is talking about starting to take the “punch bowl” away by raising interest rates. Market technicians, with their fancy charts, are pointing to signs of narrowing leadership, the rolling over of the advance-decline line and market breath is deteriorating (ratio of new highs to new lows).
But the bulls say, the market should be looking ahead. Barring some kind of cataclysmic event, the economic backdrop is improving rather than deteriorating. Consumers have been given a tax cut with lower oil prices, corporations remain cash healthy and multiples are high but not atrocious in a low-inflation & low-interest rate environment. The Atlanta Fed’s GDP forecast for the U.S. economy has started to tick up again, growth will be positive in Q3. Jobs are being created and wages are slowly rising.
The ECB is still in there buying $65 billion worth of bonds per month until September 2016. The PMI for both manufacturing and services in the Euro Zone continue to show expansion at a pace slightly better than expectations.
Now, if you have been following the financial news, everyone has been anticipating a correction. The New York markets haven’t had a serious correction since 2011. See the 5 year chart below of the S&P 500:
I have been writing that it is next to impossible to time the market. The U.S. stock market has been on a roller coaster ride for most of this year. Last week’s stock market drop could to the start of an overdue correction. A large one day drop usually is due to “FEAR”. The chart below is the year to date price action of the S&P 500:
Is there anything new in the mix? Maybe the realization that China’s economy is weaker than we thought (numbers in the 3-4% GDP growth range are becoming more prevalent) and that the country’s leaders are a little less capable at managing the markets and the economy. The Tianjin explosion has also undermined the people’s confidence in the leadership.
The other big story is the falling price of crude oil. Most oil experts were expecting a big rebound in the price of oil in the second half of 2015. Wall Street gets very nervous when some of their “golden boys”, (hedge fund managers) like renowned oil trader Andy Hall loses money.
Hall’s Astenbeck Capital Management hedge fund reported a loss of $500 million, the second largest loss in the history of the fund. Hall’s past successes at Citigroup earned him a $100 million bonus, plus he has a pricy art collection and owns a castle in Germany.
Fasten your seatbelt, expect a lot of turbulence in the stock markets around the world. We are in for a very bumpy ride. Cash is king, get ready to pick up some real bargains!!!
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” – Peter Lynch