Everyone settle down. It might take a few days for the dust to settle, but Friday does not an apocalypse make.
The DJIA had a horrible day Friday, losing 318 points and experiencing its first back-to-back declines of more than 1 percent since April 2012. The S&P 500 (NYSE: SPY) got slammed for a loss of more than 2 percent (2.09 percent to be exact), which was the worst day since June and the league-leading Midcaps (NYSE: MDY) and Small caps (NYSE: IWM) were smoked for losses of more than 2.5 percent.
What is there to say about Friday’s market freak out, other than the massive sell-off is a prime example of the herd mentality existent in the market. Does Friday mean anything? Of course it does, in the near term, but in the longer term, not really. Before dealing with that, though, let’s look at what prompted the first few buffalo to run.
- The Turkish lira sank to a record low against the dollar for a ninth straight session, this despite the fact that the country’s central bank had intervened in the FX market. In addition, the South African rand fell to levels not seen since 2008, Ukraine’s currency dropped to a four-year low, and the Brazilian real hit five-month lows.
The above is nothing new. The market has been all in a tizzy about the emerging markets before. It is as good a reason as any for the market to take needed break. Remember, even though such large-scale stampedes inspire fear when the earth shakes and a colossal cloud of dust blots out the sun, from time to time, the herd loses its collective cool and, well, runs right off a cliff en masse.
- If this sounds familiar, it should. Recall that in June of last year, traders freaked out about the potential for another emerging markets crisis/contagion. The worries slammed the S&P for a loss of 2.5 percent that day. However, that potential crisis faded before it even got started and stocks immediately reversed higher in the ensuing week.
Again, Friday’s sell-off happens now and then, and it should. I might not like it because my personal portfolio takes a hit, but I understand the market has to continually rebuild the layers underneath so it can go higher on a firmer foundation.
- As ugly as the past couple of days have been, the market has bounced out of this situation and back into a bullish trend before. In fact, it’s happened three times within the past eight months.
- While the headlines look terrifying, this isn’t the end of the world. It’s not even the end of the bull market. It’s just the end of a pretty good leg of the bull market, and a well-deserved break for stocks.
- News outlets make more money when they can make a huge deal out of a relatively minor event … Don’t take everything you hear to heart. To the media, a 7% selloff is a financial apocalypse. To regular investors like you and me, a 7% correction is just part of the game.
Yes, Friday was a huge day in the market, and, yes, the market has been set back a peg or two, and, yes, my guess is most folks took some kind of loss, but avert your eyes and ears from the doomsayers coming down from the hills to preach in the streets. They have latched onto Friday as their vindication, their “I told you so” moment.
- While the carnage has been real this past week, market internals remain very solid and should lead to much higher prices after the weakness ends. The markers typically seen when a bull market ends are simply not there at this time and they will take weeks, months or even quarters to appear.
Okay, so the above is just another writer’s opinion about the future of the market, but it is one I share because I too see the internals are still solid. The fundamentals have not changed since Friday, or Thursday for that matter, which is when the big sell-off began.
- Caterpillar expects economic growth to pick up in the world’s developing economies in 2014.
Here is another thought for you to consider as the market roils and boils its way through a correction. Keep in mind when reading the excerpt below, one of the most troublesome underlying fundamental problems for both business and government arising from the Great Collapse was the issue of underfunded pensions. These behemoth weights hung like titanic anchors around the necks of these enterprises. Underfunded pensions have been one large reason companies and governments on all levels have been hoarding cash.
- Large companies’ pension plans are reporting among their best returns on record in 2013, dramatically closing funding gaps that had opened up because of losses in the 2008-2009 stock market collapse, and as government bond yields sank. All told, companies in the S&P 500 saw an aggregate improvement of more than $300 billion in their pension plans, a gain that brought assets to around 93 percent of expected obligations, according to International Strategy & Investment, a New York research firm.
Go on, get out and have a good day. The market will unfold with or without you watching it. Tomorrow, check in, and get a feel. When you think the herd has settled down, pick the surviving bulls and run with them. My guess is they will head back up the hill to feed on the green grass again.
Trade in the day; Invest in your life …
