Is this stock market sell off going to continue? By Ken Mahoney

As you know, the stock market is in correction mode right now. Because of the recent volatility and uncertainty, this will be a special commentary that focuses on three things: 1) What is causing the current selloff in stocks? 2) Perspective. Are selloffs like this normal? 3) Is there a silver lining?
What is causing the current selloff in stocks?

1. Uncertainty

Uncertainty creates a void for investors. It makes valuing asset classes difficult when the future is so unclear. We are currently facing regulatory uncertainty.

Germany made a unilateral change to the way European sovereign debt and several German bank stocks could be traded. There was no coordination or even consultation with other Euro member countries.

Here in the United States, there is a tremendous amount of uncertainty surrounding the new financial regulations coming from Congress after the “Flash Crash”. It doesn’t help that the cause of this crash is still unclear.

2. Greece

On Thursday, Greek government workers went on their fourth 24 hour strike this year, still upset about the severe measures associated with the Euro bailout. This strike took place just one day before the German Parliament was set to vote on their involvement in the Euro bailout. Needless to say, the timing of the strike cast doubt as to how Parliament would vote. On Friday, German Parliament did approve the bailout.

For now, it seems that Greece has turned over a new leaf and will be forced to be more financially responsible, but other questions still remain. Will they stick to their promise to be more fiscally responsible? Will other Euro members renege on their promise to participate in the bailout? At best, the Euro bailout provision moves forward as designed, leaving the European Union intact. The weight of the rescue plan though, will temper any economic recovery needed in that region.

3. Possibility of a decelerating recovery

With all of the uncertainty in Europe, the timing couldn’t be worse for economic indicators in the U.S. to hint at a possible slowdown in the pace of the recovery. There were a number of announcements this week that added fuel to the flame.

- The Conference Board’s Index of Leading Economic Indicators, which measures economic potential 3 to 6 months in the future, fell by 0.1% for April. While that was a very minor move, it came on the heels of 12 consecutive months of positive moves.
- Initial Unemployment Claims increased 25,000 to an already high 471,000 this week. That number is high when compared to historic levels associated with job creation.
- We received Core inflation numbers for April that came in at 0.9% - the lowest year-over-year reading in 40 years.

Perspective. Are selloffs like this normal?

The bull market that started in March 2009 has been extremely powerful and much progress has occurred both in the economy and in corporate earnings over the last 14 months. From the lows reached on March 9th, 2009 the S&P is still up over 63% with dividends. So far this year, the S&P is only down 2.46% after a total return of 26.5% in 2009.

Much about our economy has improved in the last 14 months. U.S. Corporate profitability seems to be on solid footing. Top line revenues are improving. The banking sector is much better capitalized compared to the pre-credit crisis levels. And employment payrolls are turning positive.

While past performance is no guarantee of future results, it is comforting to know that periodic corrections occur during most bull markets. According to Ned Davis Research, since 1928 in the S&P 500, in the period 6 to 18 months following the end of a recession, 77% of the time there is a correction greater than 10%. The good news is that only 1/3 of the time was there a decline of more than 20% in the same 6 to 18 month window. They also measured the average decline of the largest corrections since 1900, and found that the average decline is 11% and that it lasts for 38 trading days. Through last Thursday, the current correction represents just over a 10% decline, and has lasted only 24 days.

Is there a silver lining?

The recent double-digit decline in the Euro will make the European export businesses more competitive. This is a positive force for needed growth. It has also caused the U.S. Dollar to strengthen.

The recent decline in oil from $87 per barrel to below $70 is good for consumers, utilities, transportation companies and petroleum based manufacturing. This is a positive influence for global economic activity in general.

While obviously uncomfortable for investors, corrections also serve to prevent asset bubbles. We all know the pain felt from bubbles in mortgage backed securities, house prices, and the tech stocks of 2000. Regardless of how extended our current correction turns out to be, it is good to remember that corrections are a normal function of the markets, and that they may even be considered healthy when long term sustainable growth is the ultimate desire.

In conclusion, we would like to mention that it is very important to regularly assess your risk tolerance to make sure that your investments are allocated in accordance with your goals and objectives. If you feel your tolerance for risk has changed, please call our office immediately so that appropriate adjustments can be made.

Sources:
wsj.com
marketwatch.com
Bloomberg
Ned Davis Research
cnnmoney.com

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

Google Finance is the source for any reference to the performance of an index between two specific periods.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
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These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative or named Broker dealer, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.