Market Drops, but It’s Not Time to Panic

Yesterday was a bad one for the markets, with the S&P 500 falling almost 1.5 percent. With this morning’s additional drop, we’ve broken the 100-day moving average.

Time to worry?

Not yet. I’m writing this now to get ahead of the curve, since it looks like we may be in for a bit of a drawdown. As of this morning, the S&P 500 is down a little over 3 percent, which is nothing to worry about, but it might head lower.

Putting this market drop in context

There are a few things to keep in mind here:

• The stock market is still up more than 10 percent for the last 12 months—a healthy gain.
• The market remains above key technical support levels—the 200-day moving average, at around 2,010, and the round number 2,000 itself.
• Although earnings are expected to decline for the first half of the year, that news is already out. If history is any guide, we can now expect companies to start beating those diminished expectations.

More than any of these factors, the ongoing economic recovery should also support the market. The fact of the matter is that the stock market tends to do well during an economic expansion, only rolling over when that expansion ends.

We’ll have a lot more to worry about, as stock investors, when a recession looms, but that should still be 12–18 months away. The macro environment for stocks continues to look favorable.

So we’re safe?

Not so fast. There are some things to worry about:

• As I wrote the other day, the market remains very expensive.
• Risk factors are certainly there: Greece, the Ukraine, and, here at home, the real prospect of interest rate increases.

Given these risks, we could see a pullback, and maybe even a substantial one, in the near to medium term. Arguably, we should see a pullback to reconnect valuations with reality. Such pullbacks are normal and healthy, and their absence in the past couple of years is actually one more reason to worry.

Any pullback, though, should be limited in both size and duration.

Make no mistake, there will be a time to worry about the market—and it might be soon. The data we have right now, though, suggests that time is still a ways away. As always, I’ll start to pay more attention when the market cracks the 200-day moving average, at which point we can reevaluate and pull out our plans for a weak market.

You do have such a plan, don’t you?