Tuesday, May 26, 2015

Today's Market Decline Does Not Qualify As A Correction

The S&P 500 Index is down 1% today and much of the television media represent this as a market "plunge". A representative headline on CNBC notes:
As the below chart shows, the S&P 500 Index is down only 1.29% from its year-to-date high return of 3.49% reached on 5/21/2015. For the the Dow Jones Industrial Average, this index closed down almost 200 points today; however, as the market index value becomes a larger number, 100 or 200 point movements are not significant from a percentage return basis.

From Blog of HORAN Capital Advisors 5 2015

Today's market action did see the VIX increase nearly 2 points to 14.06 from 12.13 (first chart below) and the equity put/call ratio increase to .74 from .63 (second chart below). It should be noted the VIX remains at a low level and the put/call ratio is most predictive at extremes. For the put/call ratio, readings above 1.0 are more representative of an oversold market.

From Blog of HORAN Capital Advisors 5 2015

From Blog of HORAN Capital Advisors 5 2015

Additionally, from a fundamental standpoint, the economic news today was mostly positive.

 Durable Goods Orders:

From Blog of HORAN Capital Advisors 5 2015
Source: Econoday
  • "The capital goods sector is showing life, helping to limit April's aircraft-related decline in durable goods orders to a roughly as-expected 0.5 percent. Ex-transportation offers a core reading which is encouraging, up 0.5 percent following a 0.6 percent gain in the prior month.
  • "Strength in nondefense capital goods excluding aircraft reflects strength in business investment which has been soft. New orders for this reading rose a strong 1.0 percent following an even stronger 1.5 percent gain in the prior month. Shipments, after rising 1.0 percent in March, rose another 0.8 percent in April which may give a bit of a boost to second-quarter GDP estimates."
Consumer Confidence:

From Blog of HORAN Capital Advisors 5 2015
Source: Econoday
  • "After having spiked at the beginning of the year, consumer confidence is stabilizing at a solid level, at 95.4 for May which is just above the Econoday consensus for 95.1. Income expectations are up slightly and buying plans are all higher including for autos, homes, and especially for appliances.
  • "Job readings are mixed with the assessment of the current market down as more, now 27.3 percent vs April's 25.9 percent, describe jobs as currently hard to get. This reading is closely watched and will, to a small degree, limit expectations for the May employment report. But disappointment here is offset by the six-month outlook which is more favorable."
Richmond Fed Manufacturing Index:

From Blog of HORAN Capital Advisors 5 2015
  • "Regional Fed reports on the manufacturing sector continue to be soft with Richmond's at only plus 1 for May following two prior months of declines. New orders, after three straight declines, did rise but only to plus 2. Backlog orders, however, remain deep in the negative column at minus 10.
  • "Employment growth is down while shipments are in contraction for a 4th month. Price readings are flat except for wages which show a big 11-point gain to 20. Wage pressures are a trigger for an FOMC rate hike and this reading, though isolated, will get the attention of the hawks at the Fed.
  • "First it was Empire State, then the Philly Fed, then Kansas City, all showing weakness this month and now including Richmond. Data from the Dallas Fed, also released this morning, is especially weak. The manufacturing sector is having a tough time gaining momentum, held down by weak exports and contraction in the energy sector."
Case Shiller Home Price Index:

From Blog of HORAN Capital Advisors 5 2015

Source: Econoday
  • "Indications on home prices were rising solidly going into the spring selling season though there were some signs of stalling. S&P Case Shiller's adjusted 20-city house price index rose a very solid and slightly higher-than-expected 1.0 percent in March with gains across all cities and well balanced gains across all regions. These gains, however, were not confirmed by the FHFA house price index, also released at 9:00 a.m. ET today, which rose a lower-than-expected 0.3 percent in March. But year-on-year readings in both reports show an improving trend, at a moderate 5.0 percent for Case-Shiller and plus 5.2 percent for FHFA.
  • "Turning to Case-Shiller, the strongest gain in March came from Detroit where prices rose 2.6 percent following 1.2 percent and 1.0 percent gains in the two prior months. Gains in this hard-hit city speak to general strength for house prices. Prices have also been rising in Minneapolis, up 1.8 percent following February's 1.7 percent gain. West Coast cities as usual are at the top of the price list with Florida also showing strength.
  • "Unadjusted data are closely watched in the Case-Shiller data and tell the same story with a 0.9 percent 20-city gain in March. Both adjusted and unadjusted data show plus 5.0 percent year-on-year rates for both March and February in what is a rising trend from prior months."
This week is one where a number of economic data reports are released. Release dates and the data reports can be viewed at the economic calendar at this link.

In summary, as noted in yesterday's post,  Incurring Investment Risk Near A Market Correction, it would not surprise our firm if a 10+% correction were to occur in the near term. However, we do believe the U.S. economy and economies outside the U.S. are not nearing recession type levels. Issues in Greece and maybe Spain could negatively influence the market in the short term.

As we have noted in prior commentary, economic growth is not robust and there is likely to be consequences from the central bank easings taking place around the world. However, we do believe there are market segments that offer reasonable value and return opportunities for investors. Focusing on the fundamentals, both economic and at the company level, will provide a better return on one's investment time versus focusing too much attention on the daily market fluctuations, which actually have not been large this year.

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