The stock market is finally going through a downturn after roughly two years of almost straight-line growth, at least in the S&P 500 Index and the Dow Jones Industrials. Small and mid-szie stocks and international stocks are already well in negative numbers for the year.
The growth was based on the belief that world growth would pick up more steam and that the U.S. would continue to lead that strength. Recent bad economic news from Europe and disappointing numbers the last month in the U.S. have poked a hole in that thesis. Europe has had barely positive growth since the Great Recession and has for the most part has stubbornly resisted economic reforms, not just in the southern, troubled countries but in the supposedly more responsible countries as well. Taxes and red tape are very high and corporate flexibility is extremely low. I can’t think of a better example of over-regulation and bloated bureaucracy.
In the U.S. corporate profits are due to years of cost cutting, much of it borne by American workers who have seen no real increase in their paychecks since 1995 and have seen a large drop in benefits as many of them have been forced to work part-time. The huge Baby Boom generation has seen many of its numbers forced out of high paying jobs into too-early retirement, especially given the stock market losses that many of them suffered. Others are working at WalMart.
This is a huge change from the boost they gave the economy in their peak spending years, especially as they took on increasingly high levels of personal debt that increased their spending.
So, why has the stock market been going up? It has not been because businesses as a whole have been selling more. In fact, revenues are basically flat. Cost-cutting and buying back their shares as for the group as a whole been almost completely responsibe for what growth they have shown in profits. The other huge factor pushing up the market has been the unprecedented money-printing by the Federal Reserve which you can expect to continue and even pick up steam again.
However, today “feels” like at least a short-term turnaround day. Corrections are always very scary. People forget.
I do not believe this is anything like 200-2002 or 2008-2009. But, after two years of no correction of any significance, this was overdue. I expect the downside risk from here to be 5-10% and we may have fallen enough already. I would not be a seller of stocks now unless you are willing to buy them back very shortly.
Realize too that the fall in stocks has also been felt in the corporate bond market and in the bank loan market. Mortgages and US Treasury bonds are having a great time of it lately but at their remarkably low rates, only institutions are buying them.