Special Report – The Reason the Market is Down

The reason the market is down is because there are more sellers than buyers. The question is, who are the sellers?

For starters, it should not be you.

I’m not trying to be flippant here, I’m just trying to make a point that is straight forward and easier to read than the gobbledygook that you will read in the press.

Again – it should not be you. Look, equities are equities and they are risky and they experience volatility. Pullbacks like this happen. But I also understand that no one likes losing money – and you have probably lost money this year. It’s probably (caveat – I have to add the word “probably” because I can’t make an emphatic statement since I really have no control over who reads this) also true that while you have lost money, you have lost money from the TOP rather than really having LOST money. Probably.

These things happen. The equity market is not a linear function and there are periods of time that there will be pullbacks. Here’s a picture of the market I snapped on my phone today at 2:42 PM. These things happen. I’ll get more stats over the weekend and write more about that next week.

Okay, back to sellers. My opinion is that there are two classifications of people selling right now:

1. Traders
2. Undisciplined and panicking investors

I know if you are reading this you are not a trader because no self-respecting trader would ever stoop to read my measly missives… ‘cause they are too cool for that.

That leaves the undisciplined and panicking investors. To them I say, “That is really, really silly behavior.”

Why? Because acting on your gut instincts is dumb. I’m telling you, if you think you can predict this stuff you will either ultimately be right or wrong in your guess but the only thing you will realize is that you are a good guesser…or not a good guesser.

The equity market does not go up on a nice steady 45 degree line, but it does reward the patient investor. Broken record, I know…but I’m right.

Here is what’s causing all this panic:

1. Earnings estimates continue to decline.
2. People are worried about the possibility of a recession later in the year.
3. I still believe that the falling oil prices reflect an oversupply, but the panic sales of one asset (oil) can spill over into another (stocks).
4. There is a lot of warranted worry about weak global growth – this is pressuring shares around the world.
5. There are a lot of junk bond jitters in the world, which is causing credit conditions. This is not a “red zone” issue but lending standards have tightened for businesses.
6. China and the yuan – China is going to have to do something…so this remains a negative overhang.
7. The talk of negative interest rates in Europe and Japan are adding to the uncertainty.
8. The euro has been rising on concerns over financial stocks overseas, so this is another headwind.

I tried to make an even 10…I just couldn’t.

My thought is that while all of these things exist, the data is simply not showing that we will have a recession in the U.S. and I think that the economy will slog through 2016. The consumer continues to spend and while low gas prices hurt manufacturing, it lends support to spending.

Oh, and lost in the panic was this week’s unexpected drop in jobless claims which highlights that the economy actually continues to expand.

As I wrap this up, let me be clear about one thing: I’m giving a NOWCAST rather than a FORECAST. Nowcasts are based in probability while forecasts are based in possibilities. Is it possible that the data are worse down the road, yes, absolutely…and that could mean we do have a recession later this year.

BUT RIGHT NOW the data simply do not suggest that we are going to have one and that makes the probability low. Anyone who looks at the data right now and says they think we are going to have a recession is making a guess, and if they are right down the road then they can wear the crown of being a good guesser.

If I have one concern personally it is that problems in junk bonds COULD lead to less accommodative lending conditions later in the year. And if that happens, growth could be choked and that could cause a recession.

The data leads me to these conclusions:

• We will avoid a recession.
• Earnings forecasts should eventually stabilize, which will cause market sentiment to improve. This will be a positive for equities.
• Weakness in oil will be a headwind for Materials, Energy and Mining sectors of the equity market, which will delay the earnings recovery.

Please call with any questions.

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