MARKET ALERT – Wall Street Rumblings – Issue #465, February 5, 2018 by Ray Dirks

MARKET-ALERT – Rumblings Up, Down, and Around Wall Street, Issue # 465 dated February 4, 2018.

Last week was the worst week in over two years for common stocks in the United States – the week ended February 2. The Dow Jones Industrials plunged 1,097 points, or 4.1%, to 25,521. The Standard & Poor’s 500 index fell 3.9% to 2,762, and the Nasdaq Composite dropped 3.5% to 7,241. All of Rumblings’ Ten Favorite Stocks for 2018 declined, yet Rumblings thinks they will move back up to new highs within a couple of months, as will the major indexes and equities in general.

In order to put some perspective on this, let’s quote from “The Trader” column in Barron’s, The Dow Jones Business and Financial Journal, where the headline reads: “Dow’s Worst Week in Two Years Stuns Investors”. The column begins: “Now that was a bad week, and don’t be surprised if it gets worse before it gets better.

The Dow Jones Industrial Average tumbled 1,097 points, or 4.1%, to 25,521, last week, the largest percentage decline in more than two years. The Standard & Poor’s 500 index dropped 3.9%, to 2,752, while the Nasdaq Composite fell 3.5%, to 7,241. Let’s just accept it – we’re in the middle of a correction, and one that was quite overdone. Don’t be surprised if the market’s major indexes decline by double digits from peaks hit just one week ago, as fear of missing out gives way to fear of staying in.

Ultimately, though, we are betting that the pullback ends up being one to be bought, not sold – and it all goes back to economic data. For now, there’s no sign of a recession – the one thing almost guaranteed to cause a bear market – says Jason Pride, director of investment strategy at Glenmede. He notes that companies have been predicting solid earnings and sales for the rest of the year, something that should eventually support the market, too.

The selloff started last Monday, as bond yields began to rise, and kicked into high gear when Amazon.com (AMZN), JPMorgan Chase (JPM), and Berkshire Hathaway (BRK.A) announced plans to create a health-care company devoted to lowering costs. That news hit stocks across the health-care sector.

Then, on Friday, a better-than-expected payrolls report – one that contained signs of wage inflation – led to a 666-point decline in the Dow, as the 10-year Treasury yield rose to 2.852%, its highest point since January 22, 2014.

Based on recent trends, the market was desperately in need of a rest. The S&P 500 had gained 7.5% in just 18 trading days in 2018, putting it on pace to gain 158% this year, The S&P index had gone 99 days without a drop of 0.6% or more before falling 0.7% on Tuesday. “This kind of thing was long overdue,” says Michael Darda, chief economist at MKM Partners.

Even great data aren’t enough to sustain stocks when the good news is already baked into prices. The Citigroup U.S. Economic Surprise Index – a metric designed to measure the extent to which economic data have been beating or missing expectations – had begun declining a few weeks ago from its recent point. At the same time, momentum indicators such as the National Federation of Independent Business’ survey of small-business optimism have gotten so positive that they can’t get much better. Darda says, “It’s a bit foolhardy to jump on this very modest pullback as an immediate buying opportunity.”

Even after this past week’s decline, the S&P 500 has gone 404 days without a 5% pullback from its all-time high, says Chris Verrone, technical strategist at Strategas Research Partners. Such a drop would only put the index near its 50-day moving average at 2,715. A 12% drop from the high would put the S&P 599 near its 200-day moving average, at 2,532. “Put your thumb between these, and you get to where this shakes out,” says Verrone , who expects the pullback to be “unpleasant.”

After Friday’s drop, the S&P 500 still trades 17.7 times forward earnings. A further drop “would reset the base for equities,” says Glenmede’s Pride. “A pullback like this is healthy.”

Even if it doesn’t feel like it right now.”

Well, Rumblings thinks this is a healthy pullback which will be over by March, and we think that the major indexes – the Dow, the S&P, and the Nasdaq, will reach new all-time highs within six to twelve months. Accordingly, we suggest that Readers/Investors consult with their investment advisers, and then buy shares in well-managed public companies, using proceeds from the sale of bond holding or real estate investments, if necessary, to supplement your cash positions. As Rumblings has pointed out in past Issues, the move internationally toward higher rates is bringing down the price of bonds rapidly, which more than offsets higher interest earned.

Rumblings also reiterates that Readers/Investors should place no more than 1% of their investable funds in the securities of any one company. It pays to diversify!

 

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