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.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
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.
April flowers have brought May showers for the Markets?
Confidence – it’s something that investors seem to be lacking at the moment. Last week began with a strong rally as news about Europe’s debt crisis was alleviated by the announcement of a $1 Trillion aid package for Greece. The euphoria didn’t last though, as investors quickly realized that the fundamental problems causing the crisis still exist. Violence and rioting fueled by the so-called “austerity measures”, combined with ongoing weakness in Spain and Portugal also fanned the flames of investor anxiety.
Recent turmoil in Europe has led to considerable weakening of the Euro against the dollar, resulting in concern that there will be a drop in demand for U.S. exports. Such a drop could hurt the recovery that U.S. based companies have been enjoying – particularly manufacturers. Commenting on this, Quincy Krosby, chief market strategist at Prudential Financial said, "Manufacturing has been doing very well. Exports have been doing very well. And if there is any fear that the global engine is going to slow, even at the margins, it creates uncertainty.” Despite positive reports from so many areas of the U.S. economy, fear has prompted investors to pull over $12.4 billion out of equity funds in the last 2 weeks alone. At least for the moment, it seems that all eyes are on Europe.
The ride may continue to be rough for a while. The Chicago Board Options Exchange's Volatility Index — commonly known as the market's fear gauge — is up 79% since April 26, when the Dow closed at its 2010 high of 11,205. This spike in the volatility index means investors are expecting more drops in the market.
On a positive note, major indexes still advanced last week, helping soothe the wounds from the previous week’s losses. In addition, it’s good to remember that occasional pullbacks are a normal function of the equity markets. After a 14-month rally that brought the Dow back over 80% from its March 2009 low, the recent decline has been relatively modest.
Key things to watch this week: Monday – Empire State Manufacturing Survey
Tuesday – Housing Starts, Producer Price Index
Wednesday – Consumer Price Index
Thursday – Jobless Claims, Leading Indicators, Philadelphia Fed Survey
HEADLINES:
An experimental attempt to stop an oil leak in the Gulf of Mexico experienced some limited success over the weekend, BP announced Sunday afternoon. Engineers successfully inserted a tube into the damaged riser pipe from which some of the oil is spewing, capturing “some amounts of oil and gas” before the tube was dislodged, the announcement said.
Retail sales rose in April, the government reported Friday, as consumers continued to show signs of returning to stores. The Commerce Department said total retail sales rose 0.4% to $366.4 billion last month, compared with March's upwardly revised 2.1% increase.
The number of first-time filers for unemployment insurance fell last week for a fourth straight week, according to a weekly government report released Thursday. There were 444,000 initial jobless claims filed in the week ended May 8, down 4,000 from an downwardly revised 448,000 the previous week, according to the Labor Department's weekly report. The number of claims is the lowest since the 442,000 reported in the week ended March 27.
Greek Prime Minister George Papandreou declared he is not ruling out taking legal action against U.S. investment banks for their role in creating the spiraling Greek debt crisis. Both the Greek government and its citizens have blamed international banks for fanning the flames of the debt crisis with comments about Greece's likely default.
Sources: The Wall Street Journal OnlineDow Jones IndexesNed Davis ResearchMarketwatchhttp://www.nytimes.com/2010/05/17/us/17spill.html http://money.cnn.com/2010/05/14/news/economy/april_retail_sales/index.htm http://money.cnn.com/2010/05/13/news/economy/initial_claims/index.htm http://news.yahoo.com/s/ap/20100516/ap_on_bi_ge/eu_greece_financial_crisis 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.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
Will the Greek Tragedy have a ‘plot twist’ for the markets? by Ken Mahoney
It seems the markets have grown quite fond of breaking records lately, and this past week was certainly no exception. The Dow’s harrowing fall of over 1,000 points on Thursday was its biggest intraday point drop ever, and one of the most gut-wrenching hours in Wall Street history. Although the finger pointing is just getting started, the general gist of the problem, according to regulators, is linked to high-frequency automated trading. Nowadays, most trades (over half the Dow’s daily volume) are placed by computers and are initiated based on preset criteria. So if a stock begins to plummet, much like Proctor & Gamble did on Thursday, it triggers an avalanche of sell orders. When this happens, if there is a shortage of buyers, some computerized trading programs will offer lower and lower prices. The result can be a downward spiral that eventually sends otherwise valuable stocks plunging to just pennies in value.
Commenting on last week’s activity, The S.E.C. and the Commodity Futures Trading Commission said in a joint statement on Friday that they “are scrutinizing the extent to which disparate trading conventions and rules across various markets may have contributed to the spike in volatility”, then added, “This is inconsistent with the effective functioning of our capital markets and we will make whatever structural or other changes are needed.” Whether increased regulation will be good or bad for the markets remains to be seen, but one thing is certain: something needs to be done to prevent another fiasco like we experienced last week.
Even before Thursday’s hemorrhaging, the markets were already staggering from concerns that the European Union wasn’t doing enough to keep their most debt-laden countries from defaulting. In recent days, the turmoil pushed the Euro to new 14-month lows against the dollar, pushed the price of crude oil down 13%, and sent treasury and gold prices to 5-month highs as traders started parking their money in less risky investments. Even a series of positive economic reports, including the Labor Department’s better-than-expected jobs report announcing the addition of 290,000 new jobs – the biggest increase since March of 2006 – wasn’t enough to save the week. Finishing off the worst 5 days of May ever, the Dow fell 5.7%, the S&P dropped 6.4%, and the Nasdaq shed 8%.
On a positive note, the International Monetary Fund on Sunday approved a three-year, EUR30 billion loan to help pull Greece out of its economic quagmire. In addition, economists are calling for positive readings on the labor market, inventories, consumer sentiment, and retail sales, as well as more healthy earnings reports this week.
Key things we’ll be watching this week: Monday – Market Volatility, Ben Bernanke Speaks
Tuesday – Redbook
Wednesday – International Trade, Treasury Budget
Thursday – Jobless Claims
Friday – Retail Sales, Industrial Production, Consumer Sentiment, Business Inventories
HEADLINES:
BP officials said Saturday they've run into obstacles in deploying the containment dome lowered to the sea floor to catch leaking crude oil at a well head one mile below the surface. Chief Operating Officer Doug Suttles said hydrates, mainly crystallized methane frozen from the crushing pressure of the ocean and low temperatures, clogged up the opening at the top of the giant funnel after it landed on the sea floor one mile below the surface.
The April employment report delivered the best news on the U.S. economy in years. The April jobless rate rose to 9.9%, even as non-farm payrolls increased by a higher-than-expected 290,000.
Pakistan's Taliban militants were behind the botched May 1st Times Square bombing in New York, top administration officials said, reversing earlier U.S. claims casting doubt on such a connection. Attorney General Eric Holder told ABC News's "This Week" talk show, one of two Sunday shows on which he was scheduled to appear, that ''We've now developed evidence that shows that the Pakistani Taliban was behind the attack," according to an excerpt of the show's transcript.
The International Monetary Fund on Sunday approved a three-year, EUR30 billion loan to help pull Greece out of an economic quagmire. The unprecedented IMF loan, the largest financial commitment the institution has ever made to a single country, is part of a EUR110 billion IMF/European Union package that includes conditions requiring Athens to tighten its fiscal belt and raise taxes.
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.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
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.
Will the Markets bring May Flowers? By Ken Mahoney
U.S. Stocks fell sharply on Friday, ending the week on a sour note, but still finishing positive for April – the third straight month of gains. For the week, the S&P was down 2.5%, the Dow 1.8%, and the Nasdaq 2.7%. For April, the S&P rose 1.5%, the Dow 1.4%, and the Nasdaq 2.6%.
Last week’s slide was led by the financial sector as investors became increasingly concerned about how the SEC’s probe into Goldman could eventually affect other large banks. Naturally, this is an area where the public is especially skittish right now considering all the turmoil wrought on the world economy from the financial crisis that began in 2007. The technology sector also performed poorly, in part due to some disappointing earnings reports.
These stock declines come on the heels of a relatively strong first quarter of economic growth. The Commerce Department reported on Friday that the U.S. economy grew at a 3.2% annual rate during the first three months of the year. Although this slightly missed expectations, consumer spending accelerated, consumer confidence declined less than projected, and the core inflation rate slumped to its lowest number in over 50 years. Overall, we can be very thankful for a strong start to 2010, both for the U.S. stock markets, and for the economy.
On average, since 1990, May has been the best performing month of the year for stocks. And while we certainly don’t know what the future will hold, the general consensus is that things are still looking up. "We're living in a world of good growth, no inflation pressures and good earnings. That's a pretty good mixture for equity markets to do reasonably well.” said Jeff Applegate, CIO at Morgan Stanley Smith Barney. Many other industry veterans echo the same sentiments.
There are a number of key economic reports that could affect the markets next week, as well as the ongoing development of the Goldman probe, and Fed Chairman Bernanke’s address on Thursday. As always, we’ll be watching and keeping you informed!
Key things we’ll be watching this week:
Monday – Motor Vehicle Sales, Personal Income and Outlays, ISM Manufacturing Index, Construction Spending
Tuesday – Factory Orders, Pending Home Sales Index
Wednesday – ADP Employment Report, ISM Non-Manufacturing Index
Thursday – Ben Bernanke Speaks at 9:30 AM ET, Jobless Claims
Friday – Employment Situation, Consumer Credit
HEADLINES:
The Gulf of Mexico oil spill could cost BP $3 billion or more. Under current law, an oil well's owner is responsible to foot the bill for the entire cost of cleanup in the event of a disaster. In this case that includes BP and minority partners Anadarko and Mitsui. Cleanup costs are currently running about $6 million a day, according to BP.
Your next trip to the barber could trim a little more than usual from your pocketbook, depending on where you live. In an attempt to balance their budgets, states like Michigan and Nebraska are considering taxing luxury grooming services. And while you might not think a haircut is a luxury item, they argue that you could always do it cheaper or at home.
Greece will face additional austerity measures as part of the price for a massive, multi-year loan package from its euro-zone partners and the International Monetary Fund. News reports on Friday said the Greek government has agreed to implement an additional 23 billion to 24 billion euros ($31.8 billion) worth of cuts in return for the aid.
More Americans expect to lean more heavily on Social Security for retirement, and fewer are optimistic about the equity they've built up in their homes, a new Gallup poll shows.
Sources:
Marketwatch
The Wall Street Journal Online
Barrons
CNN Money
http://money.cnn.com/2010/04/30/news/economy/bp_gulf_oil_spill_cost/index.htm
http://money.cnn.com/galleries/2010/news/1004/gallery.wacky_state_taxes/index.html
http://www.marketwatch.com/story/more-austerity-on-way-as-greece-aid-talks-near-end-2010-04-30
http://www.theatlantic.com/business/archive/2010/05/what-the-future-of-retirement-looks-like/39763/
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.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
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.