More than leaves are falling on this, the first week of October. As if a starter gun were fired as the third quarter came to a close, stock markets around the world declined simultaneously. I warned last week that a pullback was in the offing and I for one would use this as an opportunity to add to positions in stocks.
But the devil is always in the details. When to buy, what to buy, how much to buy—these are always vexing questions but let’s start with the first one, when to buy. Well, that depends on how deep a pullback we will have. Technically, it was a good sign on Friday morning that the S&P 500 index opened down 10 points but then bounced off the 2019 level. If luck is riding with the bulls then we have already hit the low of this pullback and, after a few days of back and forth action, we could be headed for 1100 once again.
But what if Miss Luck has deserted her bovine buddy? Then expect the bears to take the S&P lower, possibly into the 965-975 range. That would be about a 10% correction. Remember, too, that third quarter earnings results begin next week. It may once again be the key to the market’s fortunes. I would like to see a further decline, although no one (especially me) likes to lose money. But the markets really do need to work off these overbought conditions. It is similar to a fighter, legs trembling, muscles cramping, yet continuing to battle on pure testosterone. At some point, he will collapse if he doesn’t get out of the ring for a break.
The markets have been pushing upwards for weeks now. Like the boxer, sooner or later the markets will need to correct. Previously, I have pointed out that we’ve had three corrections of less than 7% in this rally since March. This could simply be another shallow 5% pullback, or something more. Unfortunately, we will just have to wait and see how it plays out.
While we wait (patience is a virtue in money management) I have been fielding a number of questions concerning the recovery. Clients and readers, after fretting over whether we were still in a recession or in recovery seemed to have recently accepted recovery was now in the cards. However, their concern has now switched to questioning whether we will fall back into recession once the government’s stimulus efforts have abated. Friday’s Wall Street Journal echoed those sentiments and concluded that the data was inconclusive.
I’m sure Ben Bernanke of the Federal Reserve added to these worries when he told the House Financial Services Committee that consumers may have a tough go of it if unemployment remains high and incomes fail to grow. Friday’s higher than expected unemployment number gave the bears all the ammunition they needed to drive the markets lower. Of course, it was just one of many economic data points this week. The numbers are giving off mixed signals.
Auto sales, for example, were down in August after the “cash for clunkers” program was suspended. That rattled the markets. Common sense would indicate that decline should have been expected. The same reasoning would expect housing numbers will be down after the government’s $8,000 tax credit for new home buyers is discontinued next month. But sometimes the markets are long on sentiment and short on common sense.
Over the summer, I’ve written columns on why I don’t think we will have a “W” shaped recovery in the economy (Aug.20th “The Recession is Over”) and why I do think that employment in this country will not come back quickly (July 10th “What’s up with the Stimulus Plan”). If you missed those columns you can find them up on my blog: www.afewdollorsmore.com.
Whether we have a short, shallow pullback or a deeper 10-15% correction, I still maintain it is a buying opportunity for those who have the risk tolerance to hang in there.