As you've probably noticed, the equity market has wobbled downward for the last 6 weeks. The S&P 500 Index is down nearly 7% from its April high of 1,363. Foreign-equity indexes (both foreign-developed and emerging-market stocks) have also declined. It is the result of changing and disappointing economic reports.
The mood has shifted from optimism about a self-sustaining recovery to economic concerns from around the globe. These concerns include Eurozone debt problems, fiscal problems of our own government, weakness in both the housing and labor markets, and signs that the general economy is slowing again.
Why have stocks sold-off recently? The market appears to be lowering its expectations of global growth.
Why has economic data been weaker-than-expected? Multiple factors, including the Japanese quake, disruption in oil supplies, higher commodity prices, and a slumping housing market, and dismal jobs recovery.
Are there any signs of a jobs recovery? Slight to negative. Okun's Law or "Okun's rule of thumb" states a 3% increase in GDP corresponds to a 1% decline in the rate of unemployment. It will take a while to get the economy back to respectable employment numbers.
Are there strengths that the economy can build on? Yes. Low interest rates and unrestrictive monetary policy are always accommodative to an economy. Compared to the "great recession", consumers and businesses have better balance sheets. Joblessness, while still very high, has fallen. The manufacturing sector has done very well during this recovery due to a weaker dollar and emerging-markets demand.
Will this economic recovery continue? Hopefully, but it is going to be at a slow pace. Unemployment, underemployment and housing are major headwinds.
Are today's stock prices reasonable? JP Morgan had a famous saying, "stocks tend to fluctuate". After this recent sell-off, the market looks slightly undervalued, but only 2nd quarter earnings can confirm this.
In summary, the crash of 2008 is all too fresh in our memories. Many believe every downward blip is the beginning of the next crash. Be hesitant to fall prey to the doomsayers. Pullbacks are normal. We are in a soft patch, and we are concerned. We do not have enough data to determine if we are heading into another recession. Second quarter earnings will be a key indicator if we are in a decline or just a slower rate of growth. We will continue to monitor the markets and will let you know if we recommend any change of course.
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