Why stocks are tum­bling 6 years into the bull mar­ket

The Pak Banker - - BUSINESS -

Well, that was fun while it lasted. For years, in­vestors in U.S. stocks shrugged off threats - a gov­ern­ment shut­down, fear of a euro col­lapse, a near U.S. debt de­fault - and just kept on buy­ing. At the sixth an­niver­sary of the bull mar­ket in March, the Stan­dard and Poor's 500 in­dex had more than tripled in value.

Now, buy­ers are hard to find. A wave of selling has ham­mered ma­jor in­dexes, with the S&P 500 los­ing nearly 6 per­cent in the past week. That is its worst weekly slump since 2011, and leaves it close to what Wall Street calls a "cor­rec­tion," or a fall of 10 per­cent from a re­cent high.

Is there more selling to come? No one knows, but cor­rec­tions are nat­u­ral in a bull mar­ket, a pause in the mar­ket's march higher, and this one is long over­due. They usu­ally come about once ev­ery 18 months. The last one was four years ago. The big trig­ger for selling this week was yet more ev­i­dence of a slow­down in China's econ­omy, but there were plenty of other wor­ri­some de­vel­op­ments weigh­ing on the mar­ket. A look at a few of them, and why you may not want to panic, yet.

De­spite Bei­jing's ef­forts to re­store calm, the Chi­nese stock mar­ket has taken in­vestors on a wild ride this sum­mer. Then last week, the gov­ern­ment an­nounced a de­pre­ci­a­tion of the coun­try's cur­rency, stok­ing fear that the eco­nomic slow­down there was even worse than it had let on. On Fri­day, more bad news: A gauge of man­u­fac­tur­ing showed that key sec­tor on the main­land is con­tin­u­ing to con­tract. What hap­pens in China mat­ters, and not just be­cause it is the world's sec­ond big­gest econ­omy. Fall­ing Chi­nese de­mand has sent prices plung­ing for all man­ner of com­modi­ties - iron, cop­per, oil. That has wal­loped coun­tries that ex­port them. Its sur­prise de­val­u­a­tion also trig­gered other gov­ern­ments to drive their cur­ren­cies lower, roil­ing fi­nan­cial mar­kets and spread­ing fears of a cur­rency war.

The steep drop in the price of oil in the last month has be­come a ma­jor con­cern for traders. Oil briefly went be­low $40 a bar­rel on Fri­day, its low­est price since the fi­nan­cial cri­sis six years ago. If oil keeps fall­ing, it is likely to drag down the S&P 500. Drillers and other energy com­pa­nies make up a sig­nif­i­cant chunk of that in­dex. Shares of those com­pa­nies have plunged 35 per­cent in the past 12 months.

The up­side to fall­ing oil is that all the money that driv­ers are sav­ing at the gas pump should mean more spend­ing by them at stores - and a faster-grow­ing U.S. econ­omy. But Amer­i­cans are choos­ing to pay off debt in­stead of go­ing shop­ping. "House­hold fi­nances are grow­ing more healthy ... but you want to see a pick-up in spend­ing, too," said Tim Court­ney, chief in­vest­ment of­fi­cer of Ex­en­cial Wealth Ad­vi­sors.

The new fru­gal­ity helps ex­plain why the big­gest long-term driver of stock prices - cor­po­rate earn­ings - have been so dis­ap­point­ing lately. In the sec­ond quar­ter, com­pa­nies in the S&P 500 grew earn­ings per share just 0.07 per­cent from a year ago, ac­cord­ing to re­search firm S&P Cap­i­tal IQ. That is the worst show­ing in nearly six years. The next re­port card on earn­ings doesn't ar­rive un­til Oc­to­ber. In the mean­time, in­vestors will be look­ing at other in­di­ca­tors of eco­nomic and cor­po­rate health. This com­ing Fri­day, the gov­ern­ment re­ports on con­sumer spend­ing in July.

Many in­vestors pick and choose stocks based on a com­pany's busi­ness out­look, but there is an en­tirely dif­fer­ent class of trader that re­lies on tech­ni­cal in­di­ca­tors to make in­vest­ment de­ci­sions. Many of their screens were flash­ing "sell" this week. The S&P 500 and the Dow have bro­ken through a few key tech­ni­cal lev­els re­cently. One im­por­tant one is their 200-day mov­ing av­er­ages, which the two in­dexes pierced on Thurs­day, help­ing to fuel selling. Both in­dexes dropped 2.1 per­cent that day, be­fore fur­ther tum­bling on Fri­day.

The good news is the last time the S&P 500 broke through its 200-day mov­ing av­er­age, in early July, it bounced back from those lev­els af­ter a few days.

The Fed­eral Re­serve has been sig­nal­ing that, with the econ­omy im­prov­ing, it could start rais­ing rates to keep in­fla­tion in check, per­haps as soon as next month. For years, in­vestors have been fret­ting that the mar­ket could drop sharply when the cen­tral bank starts rais­ing rates. The rates, held near zero for the en­tire bull mar­ket, have been widely cred­ited with push­ing stock prices up.

This week in­vestors did an about-face and started wor­ry­ing about the op­po­site. In its min­utes from the cen­tral bank's July meet­ing, re­leased Wed­nes­day, Fed of­fi­cials ex­pressed con­cern that China's slow­down could pose risks to the U.S. econ­omy. In­vestors won­dered whether that meant the growth here is frag­ile, and started selling stocks. Ernie Ce­cilia, chief in­vestor of­fi­cer of Bryn Mawr Trust, said the switch in views is ironic, and a lit­tle un­set­tling.

"The mar­ket was say­ing, ' Start lift­ing rates. Let's get this over with,'" he said. "Now the mar­ket is con­cerned that Fed is wor­ried the econ­omy is slow­ing."

On the bright side, the U.S. econ­omy is look­ing health­ier lately. Em­ploy­ers have been on a hir­ing spree, and that has helped push the un­em­ploy­ment rate to a low 5.3 per­cent. In­vestors will get another clue on the econ­omy on Thurs­day when the gov­ern­ment re­leases its es­ti­mate of eco­nomic growth in the April-June pe­riod.

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