Stock markets overwhelmed by “market to sell” and “stop loss” orders caused a computer induced “flash crash" on a quiet summer Monday.
A 12.5 % correction occurred in the S&P 500 from the 2134.72 top in May to the 1867.01 bottom.
The SPX dropped -6.3 % in August, the index closed -4.2 % year to date.
This setback, greater than 10 %, was the first of its kind after 46 months of rising stock markets.
A Chinese currency devaluation of 3 % caused ripples around the world and cascaded global markets.
Big Cap Chinese stocks are -13.7 % YTD, after 150 % rise over the past few years.
We have recession in Brazil, with the market -32% this year and lower than 2008.
Stock markets around the world are in negative territory: Canada -16 %, Australia -16 %, Mexico -11 %, Hong Kong -6.1 %, UK -5.4 % and Germany - 3.9%.
Barclays Aggregate Bond Index –AGG, is up 0.52 % YTD.
The 10 year UST closed at a 2.22 % yield, up 5 bps since January 1.
Month end saw a 27 % crude oil rally after plunging below $38.bbl on August 28th.
A decline in oil prices in excess of 60 % from last summer’s high has yet to noticeably boost consumer spending.
Are U.S. stocks in a Bull or Bear market?
Are there any safe asset classes in which to hide?
Global stock markets are rolling over and the Fed has signaled it is about to raise rates for the first time in 10 years.
Heightened volatility, increasing downside volume, rising negative sentiment are necessary conditions for a market bottom should it be reached.
We do not expect a V shaped recovery like the one that occurred late last year. Most bull market corrections are short and swift but take 5 months on average to recover.
Stocks remain at reasonable P/E levels and are cheap relative to bonds. Consensus S&P 500 estimates are $118.79 for 2015 and $132.13 for 2016. Rising profits generally lead to higher stock prices.
With SPX at -1972.18, we calculate a 16.6 times P/E ratio. This equals a 6 % Earnings/Yield.
The market is currently discounting +2.5 % U.S. GDP and +3.3 % Global GDP growth.
When the Fed moves off ZERO interest some will conclude the U.S. economy is strong enough to deal with it.
However, If the Chinese economy implodes which we do not expect, and the world economy weakens further, Central Banks appear to be at the end of their ability to control markets.
September is historically the worst month for stock prices. Since 1990, September is down 0.4 % on average. Conversely, October ends the worst 6 month period of the year for stock market returns.
In this environment there are few safe places to invest savings. Central bankers have printed
”new money” and lowered rates to historic levels by buying their own Treasury assets in addition to corporate assets.
Investors fear the end of these QE programs will result in falling asset prices in all categories. The tension between those who fear and those who have faith will soon be resolved.
We are focused on opportunities arising from market turbulence. We believe the rules of the game have changed and expect to profit from volatility in this altered landscape.
Doug Coppola
John Coppola
9/1/15
Communication is for informational purposes only & doesn’t constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed
Communication is for informational purposes only & doesn’t constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed
