I remain convinced that our recent down turn in equity market pricing, coupled with elevated volatility, is a classic and healthy pullback. I am not in the camp calling for a meltdown - as you well know if you been reading the morning note with any regularity. Our pullback has engendered a degree of panic that normally surfaces when several themes emerge: geo-political uncertainty, concern over valuations based on corporate earnings/guidance and/or concern over the economic cycle that would necessarily impact earnings.
In the case of the former, we have certainly gotten more than our fair share of headlines. Of particular import has been the role the Russia/Ukraine crisis as we have discussed at length. This morning, for a change, there was welcome news that the Kremlin is calling for de-escalation in the Ukrainian theatre. Markets have responded accordingly.
In the case of the latter, the data speaks for itself. Listen. Our economic narrative is one that speaks to a healthy, sustainable expansion - as I have discussed here on Yahoo Finance and in interviews over the past three days with the Wall Street Journal, Reuters and CNN Money. Is it unexpected to see markets take a turn lower given the twenty plus days of record closes this year for the S&P 500? Absolutely not. I would argue the contrary, that it should be expected. Expected and welcome to the extent that the pullback is one that represents opportunity, and this pullback does, given the economic back drop we have. Had markets gotten ahead of themselves in the trade higher? It certainly appears that way. Have we found a near term bottom? Markets will make that clear, but keep in mind the pullback is only a modest 3.5% thus far. I suspect we are not there just yet despite the fact that the fear index as measured by the VIX has trade sharply higher over the past two weeks. The ISM Sentiment index is also pricing in very bearish readings - nearly historic in fact.
Record low interest rates as a result of an accommodative monetary policy continue to provide for exceptional liquidity and access to capital. The risk off fear triggered by geo-political themes has actually buttressed the Fed’s interest rate stance as global investors have piled into the security of U.S. debt. Simultaneously, markets have had the support of an earnings season that has confirmed what many had been calling for: improving earnings, revenues, sales and solid guidance.
Additionally, if you examine the litany of economic data we have been barraged with over the past month, it is clear that our economy is not only expanding, it is actually firing on most every cylinder. Employment data, manufacturing data, exports, energy production, cost of labor, hours worked, GDP revisions and positive initial data…you get the picture. Data released this morning reflects further productivity gains by American workers - yet one more required signal that indicates the high probability our improving employment trends will continue. However, source of concern remains the transitional nature of the weakness we have seen in housing as a result of the tepid rate of family formation, rapid price appreciation, institution investment involement and the difficulty consumers are having in finding financing.
There is another factor at play the speaks to a shallow pullback as opposed to a correction of significance. There is an enormous amount of cash on the sidelines. The financial crisis has left many investors inactive and unengaged - lacking confidence in not only the market but in the broader economy as well. The diminished volume figures we have seen underscore that. That cash will likely come back into the market as discounted pricing becomes more difficult to ignore.
Our markets have spent much of the week oscillating between fear and calm. Today, markets are mixed to positive here in the US. In Europe some of the velocity in the trade lower yesterday dissipated. Asian markets closed solidly negative in the overnight taking on the brunt of the global weakness in equities. We head into the weekend with equity markets mixed and with a sense of trepidation still hanging in the air.
DJIA + 0.12%
S&P 500 + 4.68%
NASDAQ + 4.47%
One Year Return (52 weeks)
DJIA + 8.12%
S&P 500 +14.95%
NASDAQ + 19.45%
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