Is a market storm brewing?
Source: Wikimedia Commons; Photo credit: Fir0002/Flagstaffotos
Instability is increasing. 100 to 300 point swings in the Dow are common. Commentators cite Ebola fears, the end of the Fed’s balance sheet expansion, an economic slowdown in China, a possible recession in Europe—there’s a lot to be worried about.
From low levels, volatility indices have almost doubled. For a while, yesterday’s market action wiped out all of 2014’s gains in the Dow. And some prominent companies are down this year: GE has declined 11%, while ExxonMobil and Chevron have fallen about 10%. But there are some high-profile winners as well: tech giants Apple, Microsoft, Intel, and Hewlett-Packard are all up around 20%. The market is mixed.
Mixed markets are rarely bear markets. Sure, the oil price has fallen, which has pulled many energy companies down with it. But other sectors have been buoyed by continued consumer spending. And stock valuations are fair; in many cases, they’re cheap. It’s hard for the bear to growl when PE ratios are in the low teens.
Since the 1920s we’ve had five market pullbacks of 30% or more. In every case, the market’s declines were exacerbated by a recession or depression. Without a contraction of the economy, earnings keep growing. And earnings growth feeds market growth. So far, the economy looks steady: no boom, no bust, just steady growth.
So don’t get worked up when talking heads start hyperventilating, drawing parallels 1987’s Black Monday. I knew Black Monday; I worked on Black Monday; Black Monday affected a lot of friends of mine. Yesterday was no Black Monday.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!