Are We Correcting?

Posted by on Aug 24, 2015

For 138 straight trading days, we’ve had dull and boring markets, with the S&P 500 having closed between 2,040 and 2,130 over that time. This had been one of the longest and tightest trading ranges in decades. Markets have rarely remained so relaxed for so long. Big (ger) volatility is much more normal; to the extent anything in investing is “normal.”

On Thursday, it was reported that activity in China’s factory sector shrank at its fastest pace in almost 6-1/2 years in August as both domestic and export demand moved lower. This created increased worries over the economic health of the world’s biggest energy consumer which then helped push energy prices down as well.

That news cracked the other Asian markets and rolled into our session. The result was that our trading range string was broken when the S&P had its single worst day since 3 February 2014. (This concern about global growth – aka, Chinese growth – whacked the markets again Friday, putting the S&P lower by another 3% for the new “worst day since” title…) Compared with what we were dealing with frequently just a few years ago, that’s almost a no meaningful figure-type number. By the way, the Shanghai market (the one not generally available to any international investors) finished down 11.6% this week, according to Business Insider. It’s now back to where it was less than a year ago…

As Jeff Saut of Raymond James accurately said this week, it has been a while since he’s observed so much alarm in the market. He observed that, “I have not seen this much fear since the spring of 2009, and we’re only about 5% percent off of the highs.”

Oil prices

To quote superstar investor Peter Lynch, “Whatever method you use to pick stocks or stock mutual funds, your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.” Or, as he also stated, “The key to making money in stocks is not to get scared out of them.” That’s well worth remembering if you’re uncomfortable today.

Perhaps a question to consider now is whether the news driving this sell-off, i.e., oil price weakness / the oil glut, together with the emerging market challenges of weak commodity prices, gets worse or better. Those answers matter a lot for the businesses and individuals in those countries under stress and for oil producers globally. But, for our economy, and even for most companies traded on American exchanges, it’s much less clear that it should create a major hit. Let’s look at why that may be true.

After that sharp drop in Chinese manufacturing, and aided by a bigger-than-expected build in US inventories, oil prices headed for their eighth consecutive week of falls on Friday. That made the longest oil price losing streak since 1986…and brought the crude price right close to its lowest point since 2009.

Oil has lost a third of its value since June on high U.S. production, record crude pumping in the Middle East and concern about falling demand in Asian economies. I believe it’s better to take a longer look at the oil price action to determine if we have issues.

Historically, according to Dr. Scott Grannis, all that’s happened since 1970 is that the oil price has recently dropped from being very expensive to just about average. The average adjusted price over these 45 years has been about $50 per barrel, closing Friday at about $40. And, the main reason for this recent drop is that producers have kept pumping – not because demand is dropping, as was the case when the crude price was last at these levels.

Because of the crude price drop, the energy sector has been the worst performer in the S&P500 so far this year, down more than 18 percent, according to S&P. Matter of fact, 85 percent of those S&P 500 energy companies are now in a bear market, with individual drops of 20 percent or more. Exxon and Chevron, two of the 30 Dow Jones components, have each lost more than a quarter of their market value since their July 2014 highs…

By the way, on Thursday, Citi came out with its “first bullish evaluation of energy stocks from the firm since the start of 2011″…a great example of the reality that when you’re not feeling comfortable is usually a better time to buy than when you’re feeling confident.

Investing considerations

It’s always easy to find reasons to sell; what’s hard is finding reasons not to every single day. Market drops always lead to way too many headlines driven by panic-based fear. Experienced investors know that staying with their holdings is way harder than taking losses. That and a solid asset allocation strategy are usually your best defenses against being whipsawed by market moves.

Some positive news lost in all the Chicken Little stories as economic reports brought more evidence that our economic growth should be modestly higher in the second half of the year, though it’s unlikely to surge. Reports on retail sales, housing starts, existing home sales and industrial production were all solid.

Goldman Sachs noted that, concerning the prospect for 2016 recession in the US, “Our response is that, while the current US expansion is long in temporal terms (6 years), the magnitude of the recovery is weak and on that basis the expansion phase is closer to early-/mid-cycle.” Translated – don’t worry about it.

Investor sentiment continues terrible – but that’s no change over the past 6 years. So what happened really this past week? Has any real damage been done to the longer-term uptrend in the market? I’m not so sure, but I doubt it. I don’t think there’s any significant damage done.

In the meantime, if the thought of having an unrealized loss of 4 percent of your money in four days really upsets you, maybe that chunk of money really shouldn’t be invested in the stock market to begin with. However, for those who do worry, understand that the benefit of owning assets that do fluctuate in value, as opposed to being committed to the so-called safety of cash, is that you retain the distinct possibility of attaining additional amounts of income – in long-term appreciation. Only sell when, as, or if the fundamental reason you made the investment is no longer valid. Market price should not be the deciding factor…

As for now, there’s one key takeaway: the ingredients are back in place for more market volatility…which, along with a potential correction, are simply other trends of a bull market.



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