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Coming off of last year's gains felt pretty good and we all have a tendency to think that recent events will continue into the future. This makes a downturn/correction even tougher to swallow.
Also, the general sense that I get from my clients is that, while the market has been up for the past couple of years, there is still a sense of trepidation and fragility. No one is too comfortable with the future yet. There is an inkling of things to come but no one yet believes.
I understand all of these concerns but let me share a chart with you that helps me put it into perspective. (Goal is to show pull back in light of run up).
The following are two charts. One from the S and P 500 Index[1] and the other from the potentially more volatile Nasdaq 100 index[2].
On the S and P 500 Index we see that, from the end of last year, the run up has been almost 40% through to April of this year. While we have started a downturn, and no one knows how deep it will get, we have only dropped approximately 3.98% (Wooden Brothers TC2000).
 Source: Wooden Brothers TC 2000 Software Data On the Nasdaq 100 Index we can see that the uptrend from the end of last year to the early part of March (12/31/2013 - 3/5/2014) rose approximately 40.07%. And since the beginning of the downtrend in early March until now we have lost approximately 7.63%.  Source: Wooden Brothers TC 2000 Software Data
My point that I am making using these two major indexes is that we have come a long way and that, while the uptrend has ended for now, we are not crashing at this moment. I realize that pullbacks are painful but my sense is that this is a normal correction here. One reason that might support this claim is that you can see that, while biotechnology and strong sectors have sold off, other sectors have started to gather momentum - such as energy stocks. This leads me to believe we might be seeing more of a rotation from one stock sector to another.
Fundamental View:
You have all probably heard me for months talk about the idea that the fundamentals are starting to improve but that is all not back on line.
There continues to be worries on the housing front, the labor front, and the general Gross Domestic Product[3] (GDP) front. Throw in a concern or two about Chinese growth and Putin's grandstanding and of course we see that the overall macroeconomic picture is not clear.
Of course there is a lot of data on all these aspects but one item you make look at to help your thinking is the 10 year Treasury yield index[4]. Most often in recoveries we see that Bond yields go up as demand for money increases. During the first half of 2013 this was the case as the yield on these 10 years Treasuries jumped from approximately 1.8% to 3% sometime in September (Worden TC 2000).
From there, however, while the stock market continued to rally the 10 year Treasury yield index stayed where it was and even dropped. It stands around 2.63% right now and I think it could have been telling us something - mainly that the economy might not be ready for a 3.5% increase in the GDP as many had predicted.
Again, I don't see a panicked rush to bonds but I think there is a sense that we might expect more of a 2.5% GDP annually.
Many of the companies I follow also continue to execute and find ways to generate earnings even in this tough environment.
IPOs are getting offered and listed (though a number were pulled in the past week or so) which, to me, is another decent sign.
In general right now you might get ready for a slew of opinions from tons of experts all over the place. Some will say the downtrend doesn't matter and some will say that this rollover is the beginning of a disaster.
To my mind, of course, anything can happen, but this selloff still appears to me to be a normal correction fundamentally as well as technically. I think we are still in a period of sub potential U.S. growth but we now have at least enough stability for companies to move forward and make decisions. Could it be a better environment, sure could. So I look forward to continued recovery, although slower than we might like, but I will keep my eye out for new developments that might be game changes.
Tim Withers is Chief Investment Officer of MSW. He has over 20 years of experience managing money on both an asset allocation and tactical basis for clients as well as serving as investment analyst to qualified retirement plans and individuals. He holds a BA from Connecticut College and an MBA from the Wharton School at the University of Pennsylvania.
Endnotes:
1. The S and P 500 Index: An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.
Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor's. The S&P 500 is a market value weighted index - each stock's weight is proportionate to its market value.
Source: www.Investopedia.com
2. The Nasdaq 100 Index: An index composed of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. This index includes companies from a broad range of industries with the exception of those that operate in the financial industry, such as banks and investment companies. Source: www.Investopedia.com
3. Gross Domestic Product:
The total value of all goods and services produced domestically by a nation during a year.
It is equivalent to gross national product minus net investment incomes from foreign nations Source: www.dictionary.reference.com
4. 10 Year Treasury Yield Index: The 10 Year Treasury Yield index is a summation of the Treasury yield curve data provide by the US Department of Treasury Source: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/
Disclosures:
"Asset allocation does not protect against loss of principal due to market fluctuations. It is a method used to help manage investment risk."
The Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index is a widely recognized, capital-weighted, unmanaged index of over 1,100 stocks listed on the stock exchanges of various non-U.S. countries.
Securities and Investment Advisory Services offered through NFP Securities, Inc. a Member FINRA/SiPC NFP Securities, Inc. is not affiliated with MSW Financial Partners. NFP Securities, Inc. and MSW Financial Partners do not guarantee the accuracy of information provided at these web sites.
The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. It is not guaranteed by NFP Securities, Inc. for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
The indices mentioned are unmanaged and cannot be directly invested into. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market
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