After trading in a fairly tight range of 2,050 to 2,130, the S&P 500 Index has again fallen into negative territory for the year declining 2% on Thursday and trading down again on Friday on pretty heavy volume as investors moved to the sidelines over concerns of further consolidation in the coming days. Most of the selling has been driven by a couple of issues focusing mainly on recent data pointing to potentially slower global growth in the coming months. Actions recently by the Chinese government are again raising fears that a “hard landing” may be taking place in China with economic growth slowing faster than anticipated. Here in the U.S., lower oil prices and lower import prices (caused by a stronger Dollar and a recently devalued Chinese Yaun) are again fanning the fear of deflation which may cause the Fed to push back any rate increase again, likely past September.
A few quick points:
• We had gone all year without a correction of 5% prior to Friday. That is the longest into a year without a 5% correction in several years so we were well overdue to see some consolidation in the equity markets given the recent increase in global uncertainty. A correction of 5% usually happens several times a year. In the recent past we have seen buyers come in and “buy the dip” when we have had selloffs in the 4-6% range; that has not happened yet.
• Seasonally we are in the worst part of the year, with August-October being the worst of any three month rolling period according to Ned Davis Research going back to 1952. So seasonal volatility is to be expected for a few more weeks.
• The uncertainty surrounding the upcoming Fed decision in September is increasing due to softer economic data and the rising threat of slower global growth. EvercoreISI is currently giving less than 50% odds that they raise rates at the next meeting. Those odds have been fluid and could change in the coming weeks.
• On the positive side, fundamentals still look good with second quarter earnings coming in ahead of lowered expectations. We still believe that the second half of the year will see year-over-year increases in both revenue (though muted by the rising dollar) and earnings. The S&P 500 Index usually peaks after the last federal funds rate increase, not the first.
• Globally, PMI numbers are still well above 50, indicating firm growth in the coming months. Over 68% of countries still have positive readings above 50, increasing since May. According to EvercoreISI, on average a recession starts 5 years after the first Fed hike indicating the economy should remain on solid ground.
• With declining oil prices over the last few weeks, gasoline prices are on track to plunge -40 cents over the next six weeks while mortgage rates have come down as well. Both should continue to help consumers.
• Sentiment remains low, which should help set the market up for a bottom in the coming days or weeks. Tim Hayes of NDR, who believes we are in a secular bull market with many years to go, sees the current environment as a buying opportunity for what he believes will be a rally into year end.
We remain constructive on the markets in the longer term but acknowledge that we could see further downside (we have gone over four years without a correction of 10%) in the coming weeks before giving way to the resumption of the positive trend we have seen in the market over the last few years. We have trimmed some positions in the last few days giving way to some downside risk. However we remain overweight equities and see further gains in the months ahead.
We are constantly monitoring current events and analyzing how we believe they will affect your portfolio. As always, please feel free to contact a member of your Fairport team if you have any questions, comments or concerns.