Is The Market Simply Enjoying A Refreshing Pause?

Much seems to be made of the S&P 500 Index's five day losing streak. Listening to the daily chatter on the daytime business channels, one would think the market has entered some type of major correction. The S&P 500 Index closed at a high of 1,725 on 9/18 and closed today at 1,692. This represents a decline of only 1.9% from the 9/18 high. On a year to date basis the S&P is still up over 20%

From The Blog of HORAN Capital Advisors

The below chart details the "daily" price movement of the S&P 500 Index over the course of the last year. Since the end of 2012 the market remains firmly in an uptrend channel while continuing to make higher lows and higher highs.

From The Blog of HORAN Capital Advisors

The next chart details the S&P 500 Index price performance on a "weekly" basis. Again, the index price movement remains in an uptrend channel on this weekly time frame. The last red candle is showing the market's return for the current week. Prior to this week, the market has generated positive returns in each full week of September. There are a few negative technical signals, such as the negative MACD cross over and negative Money Flow Index on the daily chart. On the other hand the Money Flow Index has turned positive on the weekly view chart below.

From The Blog of HORAN Capital Advisors

Of more concern is the anticipated earnings growth for companies in the balance of the year. As noted by Thomson Reuters AlphaNow, analyst had expected a weaker earnings picture in the first half of 2013 with earnings growth strengthening in the second half of the year. In a report released earlier this week, Thomson notes,

"As the third-quarter earnings reporting season approaches, growth estimates have declined to a more modest 4.8%, down from the 8.5% projection from the beginning of the quarter... Looking ahead to the fourth quarter, the current estimate is for 11.1% earnings growth, which appears optimistic, given projections for only 1.3% revenue growth."

Of particular concern is the weak revenue growth estimate. At this point in the economic cycle, revenue growth would be expected to be stronger.

The budget and debt ceiling issues in Washington could certainly have a short term impact on the market; however, these type of political issues typically do not have a long term impact on the market. The implementation of the Affordable Care Act, on the other hand, could have an outsized impact on the consumer. From recently released data on exchange premiums, it does appear middle income tax payers, including younger workers, could be paying more for their health insurance. This alone would take a bite out of these consumers' discretionary spending and consumers account for 70% of economic growth.