This week, for the first time all year the S&P 500 Index has sustained more than a 1% pullback. It needs to correct somewhat more, and despite the short term pain, this sell-off is a good thing.
Have you ever asked yourself why a tea kettle has a spout? It allows steam to escape so that the water within does not boil over. That’s what periodic sell-offs accomplish in the stock market. Daily new highs, weeks of successive gains, chasing stocks—all of those indicators were out there. As I have written over the last month, it was just a matter of time before market discipline exerted itself. I’m hoping the decline will continue for a few more days and purge some of the excess exuberance out of the markets. So why not sell now and try to catch the bottom later?
If you can do that successfully, you’re a better man than I, Gunga Din. But in the past, readers may recall, I have done just that. I have successfully told readers when to sell and when to buy back in 2007, 2008, 2010, 2011 and 2012, so why not now? The difference this time is the extent of the decline I am looking for.
In the past, each of my sell recommendations encompassed a correction in stocks of at least 10%. This time I don’t see that. We may experience a decline that approaches the 10% level but, in my opinion, a decline of that magnitude is not warranted.
You see, unlike the last few years, I don’t see the kind of market risk that precipitated big declines. The EU, Greece, Washington, U.S. debt downgrades, as well as fiscal and monetary uncertainty has been replaced with what– Cypress? Bumpy unemployment numbers? North Korea sabre rattling?
None of the above has the power to crater this market. The present concern over the last few weeks’ jobs numbers should be put in context. Remember that a lot of construction jobs were created by Super Storm Sandy, however, those repairs are winding down. At the same time we are starting to feel some of the ill-advised (in my opinion) Sequester cuts starting to show up in the data.
Clearly those cuts will do little good for the economy but they won’t sink it. As long as the Fed keeps pumping dollars ad infinitum into this economy we are all sitting pretty. On the plus side, the recent decision by the Japanese monetary authorities to follow our central bank’s lead and stimulate their economy to the tune of 7.5 trillion yen is truly unprecedented.
I was talking to a thirty year veteran of Japanese investing, Michael Longthorne, a managing director of Mizuho Securities, who described the move as “strapping a rocket onto a go cart.” We concluded that after over twenty years of economic stagnation, there is the potential that the world’s third largest economy (after the U.S. and China) could become a real factor once again in global economic growth in the years to come.
Bottom line, markets will use just about anything as an excuse when a pullback is overdue. My advice is to ignore the jibber jabber, ignore your short-term paper losses and look forward to a good year of double digit gains in your investment accounts.