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'Normal' stock drop breaks an uncommon market calm

Michael Santoli
Michael Santoli

This stock market slide is like a 60-degree August day in San Diego: A rude shock for those used to the steady local norm, but otherwise pretty mild to anyone who’s at all worldly.

The smothering pressure of asset declines across the developing world has finally forced the S&P 500 (^GSPC) out of the tight box that’s contained the index for the past half year.

Thursday’s relentless but not-quite-panicky 2.1% loss placed the benchmark a few points beneath its March low. Traders relying on this slender trading range holding up now need a new game plan.

Yet one reason it feels a bit jarring is because the US equity market has been unusually flat for months, lulling us with sideways choppy moves.

The S&P is now at a six-month low, yet is only down 4.5% in that span. That is the smallest decline out of the 623 six-month lows registered by the index since the year 1928. For what it’s worth, the one-year forward returns from a six-month low in the index have been better than the average yearly performance over the long stretch of history, according to Yahoo FInance contributor Ryan Detrick.

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The index got a bit lower than last night’s closing print of 2035 a few times in December and January, mind you. And the market is basically flattish over the past year, up just 2.5% the past 12 months. All pretty "normal," no - or even a bit milder than normal.

This isn’t to downplay the damage sustained within the U.S. market or to dismiss the severe markdowns in emerging-markets stocks and currencies. Those waking up after China’s lousy manufacturing data and the rolling selloff overseas might be wondering when things might get ugly here. Fact is, things are plenty ugly if you look closely enough.

One-quarter of all big-cap stocks are down more than 20% from their high. There were only four large-cap stocks yesterday to touch a new record high – and one of them was Hormel Foods Inc. (HRL), which fittingly makes canned meat that can help people survive in a bunker. This mean lots of “corrections” have already happened and many stocks have gotten a lot cheaper, even if the index itself has failed to succumb to a nastier gut check yet.

There has also been a lot of anxiety registered in the past several weeks. As noted yesterday, investors have hustled to the shelter of money-market funds since early July in large numbers. Some $8 billion fled stock mutual funds in the past week, the biggest outlfow in 15 weeks - a decent bit of risk aversion at work.

Still, it’s hard to find the confidence that the treacherous currents of economic slowdown, unhinged currencies, opposing central-bank objectives, colicky credit markets and stalled corporate profits will abate very soon.

Perhaps, as Merrill Lynch strategist Michael Hartnett puts it: “Arguably the only reason to be bullish [on] risk assets right now is there are no reasons to be bullish.”

Not very comforting. But there’s some truth in the idea that when all around is worrying news, much of the worry has likely made its way into securities prices.

He also says that “market stop panicking when central banks start panicking.” This is an exhausting thought, that the Federal Reserve, say, might have to “panic” by again deferring its first rate increase due to the global mess playing out. More immediately, traders are looking to the People’s Bank of China to show a bit of urgent concern by easing policy there quite soon.

The market is oversold and plenty of things are lining up for it to at least bounce soon. Note that Thursday the leaders of this long downturn – oil, emerging market stocks - didn’t suffer that badly, hinting that much of the pressure there has already been applied. The US dollar is also slipping back, relieving another point of pain on riskier assets.

A thin tape on an August Friday is not place and time to be calling an "all clear." We might be in for greater chop into the traditionally volatile month of September. But on the whole this registered as a painful, measured adjustment of prices to evolving economic circumstances. Not necessarily a preview of disaster to come.

If this bout of volatility has unnerved you badly, maybe you’re carrying more risk than makes sense. Otherwise, if you’re chilly in this stormy little cold spell, put on a sweater and wait.

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