For the past year or so we have opined that we are in a secular bull market which may very well have many years left to run. It has also been stated that during these cycles market values tend to correct every four or five years. Since the beginning of this year the expectation of a 10-12% correction happening sometime this year was very real due to historical odds. With volatility returning to the major market indexes this past week, the question quickly has turned to “are we in a bear market”? To be sure, market moves of more than 1.5% both up and down every day since last Tuesday, investors have become very nervous. In actuality though, the S & P 500 is down 6% from its all-time high less than one month ago.
Market values cannot go up in a straight line forever and need to correct from time to time to build strength for the next leg upward. Attention has been drawn to this volatility most recently because the large company stocks as measured by the Dow Industrials and the S & P 500 have finally taken the hit. Since June though, the smaller stocks have corrected as evidenced by the Russell 2000 Index of smaller stocks which is down over 14% from their highs. Many other stocks in the energy sector are down much more. This spillover from weakness in the small companies to the large companies is common in corrections since all markets will normally feel pain before a correction is over.
Another market mover, if even for a short period, is outside sources or world events. The possibility of the U.S. and Saudi Arabia punishing Russia for its military occupations by pressuring the price of oil down to the $80 – $85 range to cripple their income flow has impacted other areas. The price of oil is currently at $86.00. This price decline from the recent $110.00 price has hurt the oil industry and their stocks have declined.
The U.S. dollar has also been propped up almost 8.5% since June which is an enormous increase.
On the opposite side of the dollar increase is commodities which all get cheaper relative to the U.S. dollar. Gold is down 10%, copper 5%, silver 20% and oil down 15%. International markets in their native currencies have taken a big hit. Treasury Bonds, since they are loans in U.S. dollars, increase as the dollar does.
Outside sources are currently causing serious moves in markets worldwide. We are witnessing those directional moves in some areas; interest rates, U.S. dollar, oil, etc. cause opposite moves in many other sectors. As the “manipulated” markets return to normal, so will the affected opposing markets. It is impossible to effectively predict and trade on when these shifts will take place. Diversification and having cash for immediate needs is the best strategy for overall long term growth.
Almost every sector in the equity markets are currently very oversold especially energy and materials. The U.S. dollar’s rise seems to have topped out last week and should start to head lower versus other world currencies. Corporate earnings still look pretty good going forward while manufacturing remains strong.
Whether we will see the complete 10-12% correction that we expected this year remains to be seen, but volatility should be expected to continue for the next couple of weeks.