Perspectives on the Recent Sell-Off in Stocks - August 1, 2014
Since reaching all-time highs on 7/24/14 and 7/16/14 respectively, the S&P 500 Index and Dow Jones Industrial Average have been selling-off for the past 5 days (see Table 1). Most risk-based assets have been following suit including U.S. Mid Cap and Small Cap, International, and Emerging Markets stocks. Reasons cited by market pundits include fears of the Federal Reserve (Fed) raising interest rates sooner than consensus forecast (late spring of 2015), fighting in the Gaza Strip and Ukraine, Argentina defaulting on its debt for the 7th time in its history, and mounting losses at a Portuguese Bank – Banco Espirito Santo.
In our view, these are all excuses for a very tired bull market that is taking a summer holiday like most of the world’s working professionals, particularly in the U.S. and Europe. Stock markets around the world have been rallying almost non-stop since October 4, 2011. A correction, one which we believe will be less than 10%, is long overdue and much needed.
Stocks remain in a sweet spot because the economy is slowly recovering, there is plenty of liquidity available thanks to easy monetary policy, and inflation remains low. While the Fed is on schedule to finish monthly bond purchases in October, Fed officials have gone out of their way to reiterate that interest rates will remain low for quite some time. Corporate earnings continue to be strong. From a valuation perspective stocks are no longer cheap, but they are not expensive. As long as the economic recovery stays on track, valuation is not a risk. Stocks continue to offer higher relative value than bonds or cash.
Yet, talk of stocks in a bubble and corrections have been prevalent since late last year as many investors have been skeptical with this year’s stock market rallies. Bull markets in stocks do not end with the absence of euphoria. As the late, great, stock investor Sir John Templeton would often say:
“Bull markets are born in pessimism, grow in skepticism, mature in optimism, and die in euphoria.”
We believe that the U.S. stock markets are currently in the early stages of Sir John’s maturing phase. It will be onward and upward for stock prices until economic growth demonstrates sustainable acceleration, leading to a significant improvement in job growth, wage growth, and inflation. At that point, the Fed will be behind the curve and may need to play catch up rather quickly by raising interest rates slightly more than the market forecasts. This may very well be further into the future than late next spring.
S&P 500 Index- 1,987.98 reached on 7/24/14
Dow Jones Ind. Avg. - 17,138.20 reached on 7/16/14
Current (8/1/14 open)
S&P 500 Index- 1,931.65
Dow Jones Ind. Avg. - 16,558.00
S&P 500 Index- -2.83%
Dow Jones Ind. Avg. - -3.39%
At this time, we are not contemplating any changes to our investment strategies. We remain vigilant in our monitoring and evaluation of global economic and geopolitical events and will certainly keep you updated as conditions warrant.
Andrew Zimmerman Chief Investment Strategist
Notes: The DT Investment Partners’ Market Commentary discusses general developments, financial events in the news and broad investment principles. It is provided for information purposes only. The material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Investments in various asset classes entail different investment risks. For example, small cap equities tend to be more volatile than large or mid-cap equities. International equities and emerging markets have exposure to currency fluctuations, foreign taxes, political instability and the possibility for illiquid markets. Fixed income investments involve interest rate and credit risks among others. Real estate investing includes risks such as declines in value of real estate, changing economic conditions, tax laws or property taxes. Commodities’ investing is highly volatile and subject to changing economic conditions and the vagaries of speculators among other risks. Further, diversification and strategic or tactical allocation do not assure profit or protect against loss in declining markets. Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index. Past performance does not guarantee future results.
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Luke Johnson is a Registered Representative of Coastal Equities, Inc., and an Investment Advisory Representative with Coastal Investment Advisors. 1201 N. Orange St., Suite 729, Wilmington, DE 19801. Securities are offered through Coastal Equities, Inc. Member FINRA