/perspectives/weekly-viewpoint/the-long-awaited-correction-finally-arrives

The Long Awaited Correction Finally Arrives

After trading in a tight range for most the year, markets took a turn for the worse over the past 10 days reflecting an uptick in global growth concerns and plunging commodity prices. The sell-off pushed the S&P 500 into correction mode (defined by a 10% pullback from recent highs).

August 28, 2015    |    By Mike Schwager

Performance for Week Ending 8/28/15:

The Dow Jones Industrial Average (Dow) rose 1.11%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.84%, the Standard & Poor’s 500 Index (S&P 500) gained 0.91% and the Nasdaq Composite Index (NASDAQ) tacked on 2.60%. Sector breadth was positive with 7 of the 10 S&P sector groups finishing higher. The Energy sector (+3.65%) led the way higher followed by Technology (+3.09%) and Consumer Discretionary (+1.65%).

Index* Closing Price 8/28/2015 Percentage Change for Week Ending 8/28/2015 Year-to-Date Percentage Change Through 8/28/2015

Dow

16643.01

+1.11%

-6.62%

Wilshire 5000

20606.57

+0.84%

-3.21%

S&P 500

1988.87

+0.91%

-3.40%

NASDAQ

4828.32

+2.60%

+1.95%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 8/24/15 – 8/28/15

After trading in a tight range for most the year, markets took a turn for the worse over the past 10 days reflecting an uptick in global growth concerns and plunging commodity prices. The sell-off pushed the S&P 500 into correction mode (defined by a 10% pullback from recent highs). Uncertainty over Fed policy has added to the negative tone as the recent turmoil appears to have lowered the odds of a September lift-off. It almost seems we have reached the point where investors would like to get the initial rate hike behind them and receive clarity on the path higher. A delay in Fed action could also send the message that the Fed may be more worried about the economy than the markets currently believe.

While our markets have been punished due to the items mentioned above, our economic situation has continued to improve. Jobless claims remain near multi-decade lows, housing data has returned to pre-crisis levels, durable goods orders were strong for a second straight month and the second quarter GDP was revised to +3.7%, solidly ahead of the initial estimate of +2.3% and well above economists’ expectations. In addition, the markets forward valuation has become more supportive as a result of the recent sell-off

Been Here Before
“Turmoil” and sharp sell-offs have occurred many times throughout market history. During October 1987, the market plunged over 28% in less than a week. During 2001, terrorists attacked the World Trade Center and the market plunged over 11% in the days that followed. More recently, the market declined by almost 40% in a two-month period following the Lehman Bros. debacle. When these events were unfolding, it felt like the market would never recover and the prudent thing to do was throw in the towel. However, as we know through the benefit of hindsight, over time the losses were recouped and the markets moved to new highs. In other words, sometimes the greatest investment opportunities are born from the biggest obstacles.

Very few people make good investment decisions in the throes of panic. While headline risk will continue to weigh on markets in the near term and the overall risk profile has certainly increased, historically sharp sell-offs tend to be healthy in the sense that they help cleanse the market of “weak holders” and “quick money” guys and in turn set the stage for better entry points for longer term investors. Think of the recent sell-off as a flu shot – while the shot itself is painful, it is a necessary evil before the healing process can begin.

Throughout history “bear” markets (defined by a 20% or greater decline) have almost always had a combination of the following items in place: sharply higher oil prices, tighter monetary policy, an inverted yield curve, and/or a growing probability of a recession. Clearly none of these items are currently in place, suggesting the recent weakness in prices will likely prove temporary. With that said, we do remain in a seasonally weak period for the markets and as such they are likely to give us more of the same over the next several weeks – meaning lots of ups and downs with little forward progress.

The Week Ahead
The focal point of the upcoming week will be Friday’s release of the August payroll report. This will be the last jobs update ahead of the September 16/17 FOMC meeting and could be a determining factor (among others) whether the Fed chooses to initiate lift-off at the conclusion of the meeting. According to Bloomberg, nonfarm payrolls are expected to rise by 220K while the unemployment rate is expected to dip to 5.2% (from 5.3%). Other economic reports of interest include; the August ISM manufacturing index, July construction spending, the ADP’s August Employment Report, and the Federal Reserve’s Beige Book report. The earnings calendar continues to wind down with just a handful of S&P 500 member scheduled to report during the week. On the Fed front, three officials will make public appearances: Boston president Eric Rosengren on Tuesday, Minneapolis president Narayana Kocherlakota on Thursday and Richmond president Jeffrey Lacker on Friday.


Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is 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 is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no gua rantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.


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