That plunge in stocks is just the beginning
Analysts are advising caution from here on out, and investors appear to be rotating back to large-cap names.
If the ups and downs of the past week have taught investors anything, it's that there are cracks in this 5 1/2-year-old bull market.
The lesson for investors? Tread carefully.
Stocks took a tumble as a raft of economic data sparked fears the Federal Reserve could speed up its timetable for raising interest rates. The Standard & Poor's 500 Index ($INX) took its biggest weekly hit in more than two years, losing 2.7 percent. The Dow Jones Industrial Average ($INDU), meanwhile, sliced through its 50-day moving average and erased the gains that had tenuously built up this year.
"It reminded people that the stock market can actually go down. It seems like a lot of people had forgotten," said Mike O'Rourke, chief market strategist at JonesTrading.
This past week saw a number of economic indicators: a robust 4 percent expansion in second-quarter GDP suggested a resurgence in economic activity, while a jump in a highly-watched wage index was a sign that employee earnings, the holy grail of labor market growth, was finally picking up. Even Friday's soft jobs report didn't undo the worries about the Fed.
Indeed, investors should expect more volatility, not less, as the Fed moves closer to rate hikes, analysts say. The central bank is generally expected to begin raise its key lending rate in the middle of next year.
"Every time we see data really heat up, it will really spook investors and keep a cap on the equity market for the time being," said O’Rourke.
That's not to say all market participants are calling for a steep drop. "We see the mid-cycle rally as having plenty of room to run before we get a 10 percent-plus correction," said Binky Chadha, a particularly bullish strategist at Deutsche Bank, in a Friday report.
Still, the trepidation in the market may leave it open to the kind of knee-jerk reaction seen on Thursday, when the Dow skidded 317 points for its biggest one-day loss since February.
"A very small impetus can have an exaggerated effect. That may be the kind of market we are in for the rest of the year," said Scott Clemons, chief investment strategist at Brown Brothers Harriman Private Banking.
Given that murky outlook, strategists are advising caution. O'Rourke notes investors appear to be rotating out of riskier small-cap companies back toward stalwart large-cap stocks.
That's represented in the relative performance of the Russell 2000 ($TOMX), which is more heavily weighted to companies with smaller stock-market capitalizations, versus the large-cap S&P 500. The Russell 2000 is down 4.2 percent on the year, while the S&P 500 is still up 4.2 percent during that time frame.
Cash and cash-like investments are also growing in popularity, since that leaves investors able to act should volatility inspire new investing opportunities, according to Clemons of Brown Brothers Harriman Private Banking.
"The option value of holding cash is a nice thing to have in an environment of higher volatility. We're happy to use that cash if the market gives us that volatility," he said.
In the coming week, investors will digest a series of economic news and more earnings reports that could add or subtract from market fear.
The Institute for Supply Management's service sector data comes out on Tuesday, alongside numbers on factor orders. Trade deficit data, often look to for its signals about gross domestic product, arrives on Wednesday. And productivity numbers come on Friday.
Saying a correction is coming is a bit ridiculous, don't you think? I mean, corrections always come along don't they? That said, I am bullish long term on U.S. markets; why, you ask?
Trailing S&P 500 P/E at 19, a bit high but nowhere near bubble territory
Even if short term interest rates rise (and they will), money will still be very cheap by historical standards.
Much pent up consumer demand; they're not spending for the same reason corporations aren't; no confidence in Washington.
"Re-shoring"; despite what many think, jobs are moving back here due to geopolitical concerns, shipping costs, etc.
So yes, short term pain, long term gain. That's my story and I'm stickin' with it. : )
I think I'm going to start making some big signs, grow my hair and beard long again...
Where's that old gingham robe.?
Then get me a couple of tin cups...
Then go stand on street corners, or Interstate ramps...
Then blah, blah,.....sweet geezus, you people are never going to get ahead, without trying...
Good one Tog. Stossel did that a while back, made $120 in a few hrs. , tax free, no effort just sat there on the side walk. Not a bad return for a greenhorn.
When Stossel ask tin cuppers why they do it the answer is always the. With little education I can make better money than working, I can choose my work days and hours. I'm free.
I think I would rather be hunting rooms or fishing, so good luck with your tin cup Tog.
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