The S&P 500 lost 11% in six trading days during August’s abrupt selloff. Though it recouped some of the losses early in September, negative economic and political news kept coming pushing equities down further. All Size and Style segments of the market were negative during September as were all economic sectors with the exception of Consumer Staples and Utilities.
The question in investors’ minds is whether we are at the end of a correction or the beginning of an economic downturn.
Technical data shows that volatility only spiked in equity markets and not in the currency or bond market, an indication that the source of the selloff is not a recession. This is backed up by a healthy term spread, a leading indicator of recessions.
Macroeconomic factors are not as bad as many fear. The strengthening dollar has been a major source of headwind to multi-national corporate earnings but has weakened recently against the euro and yen. Those two currencies impact nearly 60% of S&P 500 profits overseas and a weaker dollar translates back to stronger earnings earned overseas. Jobs gains have been a bright spot for most of the year but Friday’s employment report showed fewer jobs were added in September than expected. Still, the change in payroll and monthly employment growth for 2015 is solid in historical context. China has been a source of consternation due to growth concerns but it has been slowing for years and slowing growth is not the same thing as contraction.
The key takeaway is the effect the correction has had on valuations. Corrections serve a healthy purpose of chasing less committed equity investors to the sidelines. There are now great opportunities for committed investors as multiple measurements we track show stocks are cheap relative to bonds. We will get into these measurements in our next post. While some firms and investors may be going to cash, we will continue to stay invested to take advantage of the return potential stocks provide ahead.