Why did stocks drop so far on Wednesday?
Provided by Michael Fassi
One could attribute the big dive to many factors. The bigger question is whether they are troubling distractions or indications of longer-term economic malaise.
In terms of domestic indicators, there wasn’t a compelling reason for the drop. U.S. retail sales were off 0.3% in September (the first decline in eight months) while wholesale prices declined 0.1%. The Empire State manufacturing index also disappointed. But the market wasn’t paying a lot of attention to domestic indicators, earnings, or Wal-Mart’s announcement that it was going to open fewer of its Supercenters in 2015.1,2
Instead, the market was preoccupied with Europe and Ebola. News that a second health care worker had been infected with the virus (on the heels of the announcement that the first had flown to Cleveland pre-diagnosis) rattled investor confidence along with a 2.9% fall for Germany’s DAX index, a 2.8% fall for the FTSE 100 in the U.K., and a 3.6% slip for France’s CAC 40.3,4
More disturbing, perhaps, was Wednesday’s quick flight to Treasuries. The yield on the 10-year note briefly dipped under 2% before rebounding; that hadn’t happened in 15 months. The 10-year yield has fallen about 1% during 2014, in marked contradiction to Wall Street’s expectations.1
Fortunately, word came late in the trading day that Federal Reserve chair Janet Yellen was very optimistic about the near-term U.S. economy. According to Bloomberg (which quoted sources present at a closed-door meeting with the Fed chair), Yellen sees roughly 3% GDP for the U.S. in 2015, Europe notwithstanding. That and the usual opportunity to buy the dips helped the market recoup some of its losses Wednesday.5
So will the S&P 500 log a correction (it came close to one Wednesday) or will we see a rebound? It could be that as Europe goes, so goes the U.S. – and if so, investors may do well to brace for further losses. (A euro area inflation reading arrives Thursday.) Or, it could be that further reassurance from Janet Yellen (she speaks at a conference in Boston Friday morning) or the federal government about Ebola could help.
This bull market may be long in the tooth, but as Morgan Stanley chief market strategist Adam Parker reminded CNBC Wednesday, it really takes a lot to shake its foundation. The current bull has only seen two corrections (dips of 10% or greater): in spring 2010 before the Fed started buying mortgage-backed securities, and toward the end of summer 2011 when the euro looked ready to tank. “I don’t think we’re in quite as dire a position now as we were in either of those instances, so I’m pretty constructive,” he commented. “I think we’re near the bottom.”6
That could very well be the case, and it is worth remembering that stock market pullbacks also offer opportunities to pick up shares of quality firms at a reduced price. Hopefully, the turbulence will moderate next week.
1 – marketwatch.com/story/its-the-momentum-of-the-economic-data-thats-worrisome-2014-10-15 [10/15/14]
2 – dailyfinance.com/2014/10/15/walmart-scales-back-new-supercenters/ [10/15/14]
3 – cnn.com/2014/10/15/health/texas-ebola-outbreak/index.html [10/15/14]
4 – tinyurl.com/osrbhxf [10/15/14]
5 – bloomberg.com/news/2014-10-15/yellen-said-to-voice-confidence-in-u-s-economic-expansion.html [10/15/14]
6 – tinyurl.com/pusd24k [10/14/15]
Mike Fassi CLU. ChFC