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.

By MSN Money Partner Aug 4, 2014 12:02PM
Credit: © Jin Lee/Bloomberg via Getty Images
Caption: Traders work on the floor of the New York Stock Exchange, on Wednesday, July 30, 2014By Ben Eisen, MarketWatch

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.

Bracing your portfolio

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.

The week ahead

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.

The week's big earnings reports will be dominated by media companies, with results coming out from Walt Disney Co. (DIS), News Corp (NWSA), Viacom (VIA), CBS Corp. (CBS) and Time Warner (TWX).

Other big reports come from Groupon (GRPN), SolarCity (SCTY) and Marathon Oil (MRO). 

More from MarketWatch

Aug 4, 2014 12:26PM

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. : )

Aug 4, 2014 12:57PM
Because only 11% of 25-34 year olds were living with mom and dad in 1980. Today 24% live at home in the basement. That is alot of economic horse power in the basement unemployed. That does NOT grow the economy.
Aug 4, 2014 12:29PM
P.S. When Wall Street "advisers" (read "crooks") tell you to sell it usually means they're lining up to buy.
Aug 4, 2014 12:21PM
The CROOKS are telling you it is coming!
Aug 4, 2014 3:23PM
MSN has been predicting a huge stock market plunge for years. One day you will be right. Just keep saying it.
Aug 4, 2014 12:17PM
This market needs to go under Dow 16,000 to clear the air while we wait for some clarity in all the uncertainty created by lack of fiscal and political decisions and foreign crisis. Markets do not like uncertainty and we have nothing but that now.  The dog days of summer will drive this market under.
Aug 4, 2014 1:55PM
Aug 4, 2014 1:47PM
When you pump free money into the hands of a few, first comes asset "inflation" (also called a bubble) and then, later, consumer prices follow it. Free money is so circumscribed to favor the super rich that we haven´t seen inflation at a consumer´s level just yet and asset prices are distancing themselves from consumer prices to a point that a meltdown is becoming inevitable. 
Aug 4, 2014 12:34PM
Why did we have such a bull run in the 1980's when interest rates were so much higher then?
Aug 4, 2014 1:41PM
I started moving out of small caps in March, trimmed mid-caps also. Found a nice 3.2% guaranteed fund to park (in 1 401K) and wait. Sold off all foreign stocks and ETF's outside of 401K's and parked that into AT&T for the 5%+ div. return. Moved much of my 401K monies into 2015 accounts since that's when I'm retiring.
Aug 4, 2014 4:00PM
Those that control the market will not the plunge continue.  They will pump it back up over 17,000 on more lies and manipulation..
Aug 4, 2014 3:02PM
Just the beginning of a rally to DOW 20,000.
Aug 4, 2014 2:03PM

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...

Aug 5, 2014 11:53AM
No doubt, in fact we're facing a global economic meltdown.  Too bad for all the idiots who put us in this position via the last two elections but you will see your children starve to death in the streets.
Aug 5, 2014 1:11AM
the stocks had plunged even before it started it's all just a case of illusions.
Aug 4, 2014 1:16PM
You think? Nobody buys the source of the profits some companies are presenting. When you give consideration to what a Berkshire Hathaway is or a Goldman Sachs... you deduce instantly that we are printing fake money to keep garbage like these afloat. When you consider Amazon's model and it's complete lack of profitability, it's sustainability relies wholly on wiping out all other competition so it can upwardly adjust pricing and profit from unrivaled control. Now Wal-Mart is pursuing the same model. All of our woes require an ignorant selfish self-centered consumer continuing to buy into a "got to have it now" mindset and not consider the future repercussions. We are a quadrillion in debt!!! The stock you buy today will cost you a hundred fold in interest tomorrow. LET IT CRASH so we can all reconcile a way back to recovery. 
Aug 4, 2014 2:59PM

  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.

Aug 4, 2014 1:51PM
LOL. Only inside the T-Baggers' thick bubble a 2% correction in the stock market is a market plunge.
Corrections happen all the time and last week, Investors re-adjusted their portfolios after new data came online like, the 2nd QTR GDP, jobs numbers and a potential default in Argentina which is a member of the G20.
So T-Baggers, please stay out of the market just like you've been doing in the last 5 years waiting for the Obama crash. Just stay on the sidelines watching how the market continues to go up.

Aug 4, 2014 2:58PM
There won't be a plunge is stock prices.  Good lord you folks.  We have seen  a market go nearly straight up for 5 1/2 years and some of you think that these increases are due to Fundeementals?  How effin stupid can you people be?  This is a manipulated market financed by citizen moneys to insulate the corrupt political class in power long enough to make more money for themselves and their employers.  We should be back above 17,100 by weeks end.  Some of you people are very very stupid!
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