The Blood Moon is to Blame for Everything

David B. Armstrong, CFA Weekly Market Commentary

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Everyone seems to want to know why the market is selling off. My casual response to that is usually “because there are more sellers than buyers,” but these days there is so much going on that I thought it would be useful to expand on my usual response with just a little bit more. These are in no particular order of importance or cause…just my thoughts.

Europe

Oh boy…global economic worries have everyone really down right now…ESPECIALLY over Europe. Germany has been posting really sucky data lately. In fact, just last week, German industrial production and exports fell at their fastest rate since January of 2009. One data point does not make a trend but it is data, and people are beginning to worry that Germany is at risk of slipping into a recession. So Europe…yeah. It’s sucking and the European Central Bank seemingly remains behind the curve even with some of its more recent actions.

EBOLA!

Supposedly, it’s not a disease that easily transmits from person to person, especially in a country like the U.S. with generally sanitary public conditions. But somehow a medical worker treating a victim in a Dallas hospital (who you would THINK would has state of the art protective wear) has contracted the disease. So that creates worry… and when the market is selling off this is gonna get thrown into the mix. Now we have Marines setting up field hospitals in affected areas (they do not have state of the art protective gear, I promise) and no travel restrictions. The poor judgment regarding the management of this situation rivals that of a pack of innocent women at a slumber party trying to escape a serial killer in a horror movie.

Geopolitical Issues

Tacking this onto the Ebola thought, when sentiment gets negative, there starts a lot of chatter about Russia, Ukraine, the Middle East and ISIS. So mix that in, too.

Strong Dollar

Most people may think a strong U.S. dollar is good, but it hurts the revenue of other international firms.

Ugh – the freaking SMALL-CAPS

The Russell 2000 (an index used to track small-caps) is in a correction and has experienced the so-called death cross. So the word death is being used in a sentence with Small-Caps. That has people nervous.

Poor Technicals

A lot of people feel like technical analysis is akin to voodoo. I see it differently.  It’s really just a great way to visualize the effects of supply and demand in the market. So, the S&P has broken through its 50-day moving average. People who follow technical analysis generally see that as being bad.

The Dreaded Rate Hike

Jeezzz… it’s like seeing the bad guy in a hockey mask with a bloody knife with the hot unsuspecting chick standing right in front of him. EVERYONE SEES IT COMING! But alas, it is still a worry and it’s causing junk bonds to get beaten down like a perp in a Clint Eastwood movie. And problems in junk bond world can easily ooze into stocks.

Oil

Oil is in a free-fall. Good for the consumer. Bad for energy stocks. And they make up a big chunk of the overall market.

Quantitative Easing

News flash. It is coming to an end. And again, like the horror movie bad guy, everyone sees it coming but the end of Fed liquidity is probably causing some volatility.

REALITY

Look, It’s been over three years since we have seen a 10% correction. If you look at current or forward P/E ratios, it seems to me that equities are pretty fairly valued. It’s funny that when P/E’s were in the basement, it was hard to get anyone to listen that they were cheap and to an investor with a long time horizon, they were a screaming buy. Now when they seem fairly valued, everyone seems to think there will be some catastrophic sell-off as if they are just way too expensive and that the steep rise in stocks indices somehow means we should all have a serious anxiety attack.

So those are some thoughts on the current situation. Here’s what I think – my opinions. The U.S. fundamentals are solid and earnings season is upon us. Alcoa started us off last week with a pretty solid crushing of expectations.

And as for the Europe situation, the S&P states that European companies accounted for 9.7% of S&P 500 revenues in 2012 and Goldman Sachs estimates 7% in 2013.  So at less than 10%, let’s not get everything all bunched up right this very second.

Also, the U.S. exported $270 billion in goods to Europe last year; but that compares to a $17 trillion U.S. economy. So if the 2012-13 euro-zone recession didn’t cause a slump in the U.S., I say we simmer down on any Europe panic because the U.S. economy is stronger today and it’s not very likely that another euro-zone slump will be the root cause of a U.S. contraction.

Falling oil and commodity prices are a plus for U.S. manufacturers and consumers, and the Fed won’t be raising rates still sometime next year

Finally, I leave you with this.  Historically, bull markets end from recessions. I think the odds of a U.S. recession are very low. A 10%+ correction, if it does fully materialize would not be unhealthy for the stock market in the context of our still improving economy.

The charts below highlight the market action from last week. Send me any questions. I’m out of town helping a great group of advisors learn from our recent SEC audit experience (don’t worry, we did very well), and I’ll be tying a few things up during the trip that have been lingering on my to-do list but I’ll have plenty of time to respond over the week.

Weekly Market Returns 10-13-14

 

Weekly Sector Returns 10-13-14

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About the Author
David B. Armstrong, CFA

David B. Armstrong, CFA

David B. Armstrong, CFA, is a President and Co-Founder of Monument Wealth Management. Along with his role as the firm’s chief investment strategist and portfolio manager, Armstrong is viewed as an industry leader in several areas including innovative practice management, discretionary asset management, digital marketing and social media. Dave is the writer of Monument Wealth Management's weekly "Off the Wall" Financial Blog and Market Commentary, and is frequently sought after by journalists and event coordinators. Visit his full biography here.

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