I could be wrong, but after Wall Street had its worse week since November 2011, it now looks like the overdue pullback, or correction, has a really good chance of happening. So, how panicky should you be? And does this lousy start to the year mean it’s likely that this could be a down year?
Historically speaking, the first two years of a Presidential term are worse than the last two – it could be an election thing! Also, mid-term election years aren’t great for stocks. And then there’s the January Effect, which says if January is down it does not augur well for the rest of the year – “as January goes, so goes the rest of the year.”
Well, the actual history of this relationship keeps me positive on stocks for 2014. Economist Ed Yardeni has looked at 67 years of January closes [1] and the stock-year that followed and it only works 55% of the time or just under one in two times.
Other historical stories tell us that when you have a big year for stocks like 2013 in the USA, where the S&P 500 was up around 30%, then the next year is often positive. If a recession shows up, then you can count on a sliding year for stocks, but right now the global and US economic outlooks are a long way from the R-word. In addition, while January is often an up-month, the first quarter generally brings negative market results.
On the anecdotal front, NYSE traders were at pains to point out that there was no sense of panic to dump stocks and, while a 318-point fall sounds big, it’s only a 1.96% fall, where the weekly drop was 3.5%, making the 2014 fall about 4.2%.
I think we will see more falls as the S&P 500 slips under the 1800-level, which is a psychologically-important data point. Furthermore, there wasn’t any dip-buying going into the close, which makes me think there will be more sell-offs in the week ahead.
The negative side
So, what’s caused this reversal of financial fortunes in the Big Apple?
- Many key market players believe the pullback is overdue, and it will be healthy for the market. Also, it will create buying opportunities.
- Those weak HSBC flash PMI numbers for China, which made everyone think China is slowing down. It’s too early to write China off and this negativity could be overdone.
- The shadow banking concerns in China could be spooking some big players and represent a big question mark for me, though HSBC’s local chief economist, Paul Bloxham, who is ex-RBA, isn’t losing sleep over it and that’s helped me rest easy!
- Tapering is expected to start next week, and every time we’ve got close to the Fed reducing its monthly $US85 billion bond-buying, the market has slipped into a negative headspace.
- Tapering has meant bad news for emerging economies and we’ve seen currencies in a number of these economies look like they’re heading for a crisis. There are two reasons for this. First, there has been a carry-trade, where smarties borrowed cheap money in the USA and lent it to economies paying bigger returns. This is now unwinding as developed economies are looking stronger and interest rates are rising in these economies. Also, a potentially weaker China hits a lot of these emerging economies quite hard.
- Earnings season in the USA has not been crash hot, and the revenue reports and outlook statements have not measured up to expectations. Also, a lot of top US companies now export to China and emerging economies and that could have hit companies such as GM and IBM
The positive side
Okay, that’s the negative stuff but why do I remain positive on stocks for 2014, and set for a chance to buy stocks soon?
- First, currency crises are often followed by a big market bounce-back, as regulators deal with a problem that was being ignored.
- Second, US economic growth recently was revised up from 3.6% to 4.1%.
- Third, the European growth and debt-management story is miles better than a year ago, with even Ireland and Greece getting ticks from the bond market!
- Fourth, US banks are in great shape and I expect lending to start picking up over the year.
- Fifth, J.P.Morgan’s Thomas Lee still believes US earnings will be the best since the second quarter of 2012. He told the Wall Street Journal that earnings per share would be up 8%, which is higher than the 7.2% consensus call. Like me, he likes the economic story that is developing worldwide and this should underpin better profits and then share prices.
- Sixth, Indonesia, which saw its currency clobbered last year, raised 15 trillion rupiah ($1.2 billion) a few days ago when they only wanted 10 trillion. Last year, its bond raisings were under-subscribed, so that’s a win for the optimists.
- Seventh, I expected volatility this year and it happens when liquidity goes from very available to less available, so get used to it. But it doesn’t mean the bull market is over.
- Eighth, lots of people agree with me that this is the pullback that is overdue and needed. “This is a convenient and healthy short-term pullback,” said David Lafferty, the chief market strategist for Natixis Global Asset in a New York Times article [2].
- Ninth, Goldman Sachs boss, Lloyd Blankfein speaking at the World Economic Forum in Davos, Switzerland said despite the currency concerns now, he would be long emerging economies. Given their part role in this market dive, it tells me that emerging economies could be a good contrarian play. Goldman analysts expect both a correction and a good year for stocks in 2014.
The conclusion is that it’s probably not “buy time” just yet but as model Rachel Hunter once put it, talking about the success of the shampoo she was endorsing: “It won’t happen overnight, but it will happen.”
We will try to pick it right. The fact that the market did not have another big down day on Wall Street makes me think the majority of players don’t want to dump stocks. However, the emerging economies’ concerns could keep the question marks over stocks for some time.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- James Dunn: Commodity price outlook and shares to buy [3]
- Paul Rickard: Look offshore for returns [4]
- Gary Stone: Time to reckon with Reckon [5]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [6]