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Holy Cow!
4 straight days of stock market moves in excess of 4%, flip-flopping between up and down days. That’s a record. Monday, the Standard & Poor’s 500 index was down -6.66%…ominous. Tuesday, up 4.74%. Wednesday, down -4.42%. Thursday, up 4.63%. Finally, the streak is broken on Friday with another up day of 0.53%.
It all ended with the 4th down week in the market over the last 5 weeks. Stocks have skidded fast on what is seemingly a fear of another recession. JPMorgan research states that the recent stock market contraction is pricing in a 60% chance of a recession.
We acknowledge that there are signs that economic growth may be slowing in the months ahead but there is a bunch of mixed signals and we think a 60% chance is way too high.
With a downward move of -6.66% on Monday for the S&P 500, the final tally for the week was not as bad as a lot of people may think. The Dow Jones Industrial Average (DJIA) lost -1.53% to finish at 11,269, the S&P 500 Index lost -1.71% to finish at 1,178 and the Nasdaq Composite Index lost -0.96% to finish at 2,508. The Russell 2000 Index, which tracks the performance of small capitalization stocks, lost -2.40% to finish at 697.
We’ve had worse weeks on a fraction of the volatility.
Arguments against a recession are that the yield curve is positive (see last week’s blog), interest rates will be right at about zero for the next 2 years…at least, the US Dollar is cheap, corporate profits are strong and their balance sheets are strong as well. Additionally emerging markets, while slowing, are still driving a lot of global growth.
However, recession risks are seen as rising. The Eurozone crisis (Greece, Italy/Spain and now France), downgrades, the perception of failing political leadership are all seen as weighing down growth. Additionally, ISI Research pointed out last Tuesday that a plunge in the S&P 500 of greater than -16.8% over an 11 day period has only happened twice without signaling a recession (4Q 1987 and 3Q 2002).
The yield curve has not inverted since Aug 2007 and if we entered a recession under these conditions, it would be the first time in 50 years to do so.
The lower bond yields we have been seeing are a mixture of news. Right now, the lower yields are signaling weak economic activity and low inflation but they also signal much lower borrowing costs not only for individuals, but for corporations and governments too. Additionally, lower bonds yields make stocks look attractive. The problem, when you couple lower yields with a lower stock market, is that it can spell trouble for corporate pensions.
So for right now we think: Slowing growth yes, recession no.
Stay invested unless your need for short-term liquidity has change. That should be the only reason an investor is selling right now. If you can’t sleep at night, your asset allocation does not accurately reflect your risk tolerance and you should call your advisor to update your long-term planning and allocations.
Call us for help or if you have any questions.
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Securities and Financial Planning offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index. The Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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