Equity Markets have been falling since early October, but the selloff has intensified in recent days.
What has caused the recent selloff?
On September 21st, U.S. stocks (as measured by the S&P 500 Index) peaked at 2,940. Since then, they have fallen 19.8% to the low on Christmas Eve. Six issues have fueled this decline:
- Concerns about a slowing U.S. economy alongside already-weak international economies have spooked investors. Fears of a near-term recession have risen.
- Growing consensus that the Federal Reserve has raised interest rates too much and has contracted the money supply too quickly has created concern.
- The U.S./China trade dispute seems to have no clear resolution in sight.
- Algorithmic/program trading has exacerbated normal declines.
- The holidays are traditionally low-liquidity trading days, where gains and declines are magnified.
- The U.S. Government shutdown (with no apparent path to resolution on the border wall issue) has increased the political risk in markets.
Stocks have experienced sharp selloffs without recessions
Bear markets and steep declines most often occur alongside recessions. Yet economic data in the U.S. continues to be strong. A recession—should one occur—would be at least nine months away.
In 1987, a combination of slowing growth and portfolio insurance products led to “Black Monday” and a 34% decline in stocks prices over a 3-month period. In 1998, stocks fell 19% in 2 months during the Asian currency crisis. Even as recently at 2016, stocks fell 13% over 3 months due to slowing growth in Asia and declining oil prices. Yet none of these market events happened during a recession.
Markets are telling us we are in the later stages of economic growth
Stock market volatility is one of the hallmarks of an economy that has entered the late stage of economic growth. Other indicators, such as tightening credit and slowing growth, also support this thesis.
Conclusion
While the U.S. market may go lower over the next 2 years, historical examples indicate that we will likely see a short-term bounce over the coming months. Investor sentiment is clearly negative. Technical indicators such as upside/downside volumes, put/call ratios, and advance/decline lines are all pointing to a market environment where fear has prevailed over reason.
During steep declines, such as we have seen in recent weeks, investors are often tempted to retreat from stocks. We continue to recommend staying the course and positioning for the long-term instead of reacting to short-term volatility.
If you have any questions about this information or want to discuss this further, please don't hesitate to email me or give us a call here at the office.
Thanks,
Sam
Sam Sweitzer, CFA │Principal│ANSON ANALYTICS, INC.│
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