As corrections go, this has been a mild one so far. The S&P 500 Index is barely down 4% from its recent highs. The Dow and NASDAQ have done a little worse. If you happened to own some stocks with decent earnings, you have done much better than the averages.
If you believe the headlines, all this volatility is the result of problems in the emerging markets, specifically Turkey. The Turkish Lira and that country's interest rates have been the object of considerable speculation recently, none of it good. Call me cynical, but I find it hard to accept that Turkey, a country so small and insignificant on the world economic front, could have such a large impact on world markets.
Another excuse to sell, which could be closer to the mark, was the Fed's decision this week to lop another $10 billion/off its monthly bond purchase program. It is interesting that interest rates have come down, not up, since the announcement. In the past more taper talk sent interest rates higher.
Stock market investors could be worried that the Fed is pulling back too much, too soon, although the economic data does not support that view. GDP in the fourth quarter came in at 3.2%, following a 4. 2% gain in the third quarter of 2013. Most of the increase reflects growth in personal consumption expenditures, exports and fixed investment outside residential, as well as inventory investments from the private sector and local government spending.
It was a good result, in my opinion and it indicates that 2014 growth will be propelled by business spending and exports. That should also be good for employment gains. So I believe the Fed is right on target in easing off the monetary gas pedal right now.
It appears that in the short-term the selling is winding down. To me, that is a bit of a disappointment. I guess as a confirmed bull that is a strange thing to say. I was hoping for a test of the 200 Day Moving Averages (another 4% or so) before this pull-back was over. It would have cleared the air, so to speak, and set the stock markets up for a meaningful advance over the next few months. Now, I'm not so sure.
As I've said, this 4% pull back is mild, too mild for me to believe that we are going to go straight up from here for the rest of the year. Yes, it will relieve some of the overbought conditions in the markets but prices could get extended again very quickly if the market moves higher from here. We could be facing a scenario where the stocks run back up to the historical highs, catching everyone by surprise, only to fail and then sell off deeper than where we are now.
It is one of the reasons I have advised readers and clients to just sit tight and endure whatever minor paper losses you may incur. There is an underlying strength to this market and to the economy that cannot be denied. Those who have tried to trade this market during the last week have been blind-sided on a daily basis. Don't let that happen to you.
Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management