Wall Street’s selloff on Monday, sparked by a near-9% dive in Chinese shares, was a long-overdue correction that analysts said is unlikely to undermine support for U.S. stocks going forward.
“We are unlikely to be going into a bear market,” said Jason Ware, chief investment officer at Albion Financial Group, which manages about $1 billion for clients from Salt Lake City, Utah.
“There are a number of positive things happening under the surface of all this chaos and it is easy to forget those things when you see these types of moves,” he added.
After dropping more than 1,000 points, or almost 7%, at Wall Street’s open, the Dow Jones industrial average cut its losses but still finished down 3.6%. The Standard & Poor’s 500 index closed down 3.9% for the day and was 11% lower than its May record high.
An index is considered to be in correction when it closes 10% below its 52-week high. The Dow was confirmed to be in a correction on Friday.
The S&P index has accumulated 9.95% of losses in just five sessions, a correction analysts had been arguing was long overdue and a missing link of a healthy market.
The benchmark index had not had a by-the-book correction in about four years, but there were early signs that markets may begin to stabilize as U.S. stock index futures all rose at the start of the Tuesday session.
Ware and others pinned the early losses on what he called “indiscriminate selling” – automatic trading, forced selling to meet margin calls and the like.
Among the positives he and others cited, the U.S. economy has been seen on strong enough footing to warrant a Federal Reserve interest rate increase, with many expecting one before the end of the year.
While turmoil in world financial markets could undermine Fed expectations that U.S. inflation will start to rise and push back market bets on a rate hike, the U.S. economy remains strong.
The S&P 500 earnings outlook improved as well: Second-quarter expectations now are for a 1.3% increase, sharply above the 3% decline expected at the start of last month.
“Over the course of the next couple of weeks we are going to get a number of data points that reinforce the U.S. economy is frankly in pretty good shape,” said Phil Orlando, chief equity market strategist at Federated Investors in New York.
Coast Not Clear Yet
Buying market pullbacks has been a winning trade for years now, but Monday’s head fake of a rebound may have made a dent on the “buy the dip” mentality.
“I think this time around it may take a little while,” said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.
“It may attract a lot of ‘buy the dippers’ but then it failed for a second time. I don’t think you got people focused on fundamentals, there’s little focus beyond emotion and technical trading areas.”
For some, the move at the open had all the hallmarks of a forced liquidation of positions that hedge funds and other big investors had financed with borrowed money.
“There is no reason we should have been able to buy Facebook down at $73 or Apple down at $92. People had margin calls and were getting hit out at whatever prices they could get,” said Steven Spencer, partner at proprietary trading firm SMB Capital in New York. “We were buying a lot of blue chip names, down 5 to 10%.”
Apple closed the day down 2.5% after falling as much as 13%.
As dramatic as the rebound was, however, few would dare say the market has set a bottom. The Fed has been hinting for months at a rate hike, which would be the first in almost a decade and could spook investors into more stock selling.
China’s slowdown could be confirmed by more softening data, which likely would trigger further declines on Wall Street.
“The fundamental reasons why one owns stocks are unbroken. The (U.S.) economy and earnings are holding up,” said Albion’s Ware.
“That said it’s the uncertainty that drives everyone crazy; because no one really knows.”
–Additional reporting by Chuck Mikolajczak, Saqib Ahmed and David Randall