Is the worst over or just beginning?
After a tumultuous week for financial markets, investors might be excused if they still aren’t sleeping quite as soundly as they had been a few weeks or months ago.
The reasons for the market’s newfound volatility are plentiful. As Scott Wren, senior equity strategist with Wells Fargo Advisors summed it up to clients:
“The International Monetary Fund (IMF) downgraded its global economic growth estimates; the euro zone is on the verge of deflation, and the European Central Bank (ECB) seems to be doing far less than necessary to stimulate growth; ISIS is on the move in the Middle East; and Ebola has reached American shores. These have been the main triggers for the recent pullback, in our opinion. But in addition, after a long upside run, traders have been looking for reasons to take some chips off the table.”
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The question is how many chips, and for how long? And could newfound fears lead stocks into a fullblown tailspin? “Is there a fundamental catalyst for a correction?” Citi’s macro strategy team asked on Friday. “Ebola? Maybe. The 2010 and 2011 corrections were all about Europe. First Greece. Then Spain and Italy. Is it now a concern about Germany? Weakness finally permeated to the core?”
Nervous investors may want to take note that, for all the worries leading to last week’s seesaw trading, the major indices ended the week off 1 percent or less — and even after four straight weeks of declines they haven’t yet closed in correction territory, generally defined as a drop of 10 percent or more from a peak. The Nasdaq briefly reached that 10 percent mark, but it ended Friday at 7.4 percent off its Sept. 2 high. The S&P 500 is 6.2 percent below its recent top, while the Dow is just 5.2 percent off the record reached Sept. 19.
Whether or not the market dips into an official correction, many market strategists have been advising their clients to keep calm and carry on. “The sky is not falling,” Wren at Wells Fargo Advisors wrote on a wild Wednesday when you didn’t have to be Chicken Little to get that feeling. That day, the Dow Jones Industrial Average tumbled more than 450 points before recovering to close down 173.45, or 1.1 percent.
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“[I]nvestors need to put the recent market action into the right perspective,” Wren wrote. “The stock market has moved substantially higher over the last five years. The gains have been mostly steady along the way. Many have forgotten that equities are a volatile asset class and are susceptible to the whims of human emotion on both the upside and downside.”
While it’s not exactly a shock that Wall Street pros are urging investors to stay positive — telling clients to panic certainly wouldn’t do them much good — a number of analysts grounded their advice on the relatively robust outlook for the U.S. economy. “Don’t write off the U.S. economy yet!” Jim O’Sullivan of High Frequency Economics advised clients on Friday, after the release of more upbeat data.
Despite the shaky retail numbers released this past week, the economy still shows signs of improvement, including a strengthening job market, fairly solid corporate earnings and low gas prices that could provide a consumer boost. If the rest of the world is catching a cold, there are no real indications yet that the U.S. is about to sneeze. “While respecting different views is a crucial element of investing, the traditional indicators do not argue for something sinister developing on the economic front,” Tobias Levkovich, chief U.S. equity strategist at Citi, argued in a note issued Wednesday.
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We’ll find out this week whether the upward momentum from Friday’s trading continues, or whether the fears from earlier in the week win out. “We view the recent weakness as an attractive entry point for the sectors of the market that we see as best-positioned to benefit from continued economic growth in the U.S.,” Ashvin Chhabra, chief investment officer at Merrill Lynch Wealth Management wrote early in the week, before those “entry points” became even more attractive. Chhabra noted that Bank of America Merrill Lynch analysts see opportunities in underperforming industrials, companies with high dividend growth rates, and beaten-down small-caps.
And the market’s seasonal history offers at least some hope that the coming months won’t be quite as treacherous. “The buy signal for stocks normally coincides with the first game of baseball’s World Series (Oct. 21 this year), and between then and year end we will likely get a U.S. equities market rally,” Scott Minerd, global chief investment officer at Guggenheim Partners, wrote this week.
“In the coming months, a number of indicators will offer signals about how long the rally in U.S. stocks and bonds that began in 2009 can continue. One such indicator will be the so-called Santa Claus rally. As the old adage goes, ‘If Santa Claus should fail to call, bears may come to Broad and Wall.’ While it is too early to say, the coming rally in U.S. equities may be the one to sell into.”
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