On the surface, seven consecutive down weeks sounds bad. Okay, it sounds real bad. In percentage terms, however, the S&P 500 is down about 5%, which does not even qualify as a correction. In fact, it’s more of a normal fluctuation than anything else. The market is finicky, and on any given day it will offer you a different price for your securities than the day before or after.
Obviously, the bigger concern is whether the stock market is starting to adjust for a slower rate of economic growth. The number of jobs added last month was worse than the most pessimistic forecast tabulated by Econoday, which tracks economic information. Several other indicators are also pointing to slower growth, including the ISM manufacturing survey, the S&P/Case-Schiller home price index and the Conference Board’s leading indicator index.
Economists are acting as if the pace of growth has slowed, and many have cut their full-year consensus forecasts in response. Ahead of last week’s jobs report, the Blue Chip Economic Indicators survey showed the consensus forecast for U.S. GDP growth declining to 2.7%, from 2.9% in April. Ironically, stock analysts continue to be upbeat, with the Thomson Reuters’ consensus earnings estimate for the S&P 500 now projecting 16.9% growth, up from 14.6% at the start of April.
In his weekly commentary, Sam Stovall of Standard & Poor’s said he has found that
“stock investors act more on faith than fundamentals (and therefore remind me of Billy Graham more than Ben Graham) as they don’t wait for the reports to confirm their expectations.”The recent pullback in stocks suggests that some investors have made a leap of faith that the economists are right and the analysts are wrong. That does not mean that the economy will actually slow enough to drag year-end stock prices down, however.
Traders may be quick to buy and sell, but that does not make their calls correct. Furthermore, acting IMF chief John Lipsky told Reuters earlier this week that current policies are “consistent with a return to moderate growth” and that he anticipates the current slowdown will prove to be temporary.
It is important to realize that we are in a seasonally weak period for stocks. As I noted two weeks ago, June is the second-worst month for the Dow Jones industrial average and the third-worst month for the S&P 500. It is no friend to small-cap stocks either, ranking as the fourth-worst month for the Russell 2000, according to the Stock Trader’s Almanac.
Despite this bad reputation, June tends to be essentially unchanged on average. (The Stock Trader’s Almanac does note, however, that pre-election-year Junes tend to have 1% to 2% gains, depending on the index—so like Chicago Cubs fans, we can have hope.)
Given that Washington has yet to agree on a resolution for dealing with the debt ceiling and the uneven pace of economic growth, it would not surprise me to see more choppiness in the market, especially as we approach the August deadline for raising the federal debt ceiling.
The volatility may be frustrating, but over the long term, stocks compensate you for putting up with the market’s finickiness. What’s important is to focus on the current valuation of your holdings, not whether they were priced somewhat higher or lower a few weeks ago. A fundamentally sound company with good prospects that is trading at an attractive valuation is a good bargain, regardless of the mood the market is in
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