The inevitable occurred. Those who had been waiting for it to be over could finally stop anticipating the end of the Bull Run. The market’s iron man performance finally culminated in a 500-point plunge with a dramatic 318-point single-day drop in the Dow Jones Industrial Average (DJIA) on Jan. 24. The Standard and Poor’s 500 index fell 2.6 percent in four trading days to rival its biggest decline since May 2012, dropping 3 percent below its record high on Jan. 15.
The bad news is that the bull market’s breakneck pace had to slow, and some sell-off was to be expected. On the other hand, the good news is that stocks are still priced at close to record highs. It’s not time yet to get out the sack cloth and ashes.
Stress in the global markets set off problems in the United States, as frequently happens. Investment experts suggested that a convergence of various factors added fuel to the fire, including a decline in manufacturing activity in China; reports of slowing economic growth in China; worries about the Federal Reserve’s tapering-off policies; and concerns that U.S. corporate earnings might be weakening.
Why the concern about global markets? China’s slower growth causes reverberations throughout Southeast Asia and other less prosperous nations that supply it with fuel and raw materials. It is the world’s second largest economic power, and the growth engine that pulls many other smaller countries along in its wake. China’s growth may no longer be in the double-digits, but it remains higher than economic expansion in the United States.
In December 2013, the Federal Reserve announced a new tapering off policy, which means it will begin to reduce the monthly bond purchases it makes to help the U.S. economy. The reduction in this stimulus program comes as a response to the rebounding economic situation. Apart from the nervous anticipation any Fed policy revision creates stateside, the scaling back of its bond-buying program affects emerging markets, as the possibility of higher interest rates entices investors to return to U.S. shores. Together with investors’ concerns over slowing global growth and fears over declining currency valuations, these issues helped precipitate a sell-off in emerging market currencies that hit Argentina and Turkey especially hard.
Corporate earnings have failed to tantalize. Although the majority of companies reporting earnings for the fourth quarter by the end of January had beaten analysts’ forecasts, the outlook for future income growth is not positive. Indications are that some companies are lowering first quarter earnings projections.
On the plus side, the Euro-nations seem to be pulling out off the debt crisis that began in 2011 and are showing modest (very modest) signs of growth. The U.S economy is also growing – albeit modestly with forecasts indicating more of the same. Now we are back to the days of unpredictability in the markets, and we see some emotional overreaction. It remains to be seen how the Fed will respond to these recent developments. Most smart investors will sit tight and avoid knee-jerk reactions.
This overview is general in nature and is not intended to replace the advice of tax and investment professionals.