Stock Market Declines, World Ends—Again

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Jan 6, 2015 12:40:00 PM

and tagged In the News

Leave a comment

stock market declinesThe headline this morning, of course, is yesterday’s stock market decline—a loss of almost 2 percent for the S&P 500 on the heels of a weak December. There’s been a great deal of commentary pointing out that the market dropped both the last day of December and the first day of January, which means . . . what?

Not much, I would argue. We’re certainly hitting a weak patch in the market, but several days of weakness aren’t necessarily reason to worry.

Remember the bad stretch in October of last year, when markets dropped precipitously and then bounced right back up? I was on TV with Maria Bartiromo at the time, and the sentiment was seriously downbeat. Or, consider the downdraft in mid-December, which just as quickly reversed. 

After both of these drops, and at least three others during 2014, we ended up having a great year. Downdrafts are part and parcel of the market, and it’s a mistake to overreact.

When will I start to worry?

Well, I will start paying attention when and if the S&P 500 drops below its 200-day moving average, to around 1,960, about another 3-percent drop from where it is right now. History shows that’s where we should start being concerned. Dropping below that level doesn’t mean imminent problems—as we saw in October of last year, when we broke below it and then bounced back—but it’s a good point at which to take stock of your positions and risk level.

We’re not yet close to my personal worry point, from a market perspective. I'm also reassured by the strong fundamentals of the U.S. economy, as well as the fact that the two biggest risks out there actually stand to benefit the U.S. in many ways.

Major risks (that also have their benefits)

Dropping oil prices. Low oil prices have been very bad for the energy companies; much of yesterday’s market decline came from energy rather than other sectors. Over time, however, lower prices should benefit other companies by reducing their costs and increasing their sales (thanks to consumers with more money in their pockets).

We need to distinguish between short-term damage to the market indices, driven by a hit to one sector, and damage to the underlying fundamentals of the market. Whether the benefits to other companies will exceed the costs to the energy companies is uncertain and will take some time to play out, but I suspect they will.

The slow-motion political train wreck in Greece. Although only a potential risk at this point, it could well bring the European crisis back to the front pages. That said, the financial and political structures of the eurozone, not to mention its economy, are much better positioned to weather any troubles. After all, last time it was a surprise, and this time it would be anything but. In fact, the level of uncertainty in Europe appears to be helping hold down U.S. interest rates, which is good for the U.S., as European investors choose to buy U.S. assets, including bonds.

Not time to panic

Overall, while I recognize the risks we face (and there are big ones) and guarantee that at some point we'll see a market decline worth worrying about (and it could be a big one), the signs don’t suggest that now is the time to panic.

Remain calm, and carry on.

                                     

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®