TIME Markets

Chinese Stocks Continue Slump After Bleak Monday

The index tumbled 8.5% on Monday

(BEIJING) — Chinese stocks tumbled again Tuesday after their biggest decline in eight years while most other Asian markets rebounded from a day of heavy losses.

The mixed picture comes after a tumultuous day on Wall Street, where the Dow Jones industrial average ended down 3.6 percent after trimming much bigger losses. European markets were also hit badly. Analysts said it was unclear whether this was a sign the worst was over, or a reprieve in a longer-term bear market.

The declines in China were less severe. The Shanghai Composite Index was down 4.3 percent at 3,071.06 at midday Tuesday after falling 6.4 percent in the first minutes of trading. On Monday, it plummeted 8.5 percent.

In Tokyo, the Nikkei 225 index was up 0.9 percent at 18,702.66 in afternoon trading after dropping 4.6 percent the previous session. Hong Kong’s Hang Seng, which also lost 4.6 percent Monday, was up 1.6 percent at 21,595.74. Sydney’s S&P ASX 200 advanced 1.4 percent to 5,073.20 and Seoul’s Kospi was steady at 1,829.06 after shedding 3 percent the previous day.

The global sell-off was triggered by the sharp drop in Chinese stocks Monday, but experts said there was little change in economic fundamentals to justify such a massive global slide.

“There was no clear catalyst for the global stock meltdown. The lack of clarity makes it difficult to assess what is needed to stem the rout,” said Bernard Aw of IG Markets in a report.

“A coordinated policy response is critical, and much of this needs to come from Asian economies,” Aw said. “A spate of better economic news may help to allay concerns that global growth is not deteriorating. Certainly, improvements in the Chinese economy will be welcomed.”

China’s fall was the latest in a series of jarring declines that have defied multibillion-dollar government efforts to stem a slide in prices following an explosive market boom.

In New York, the Dow Jones plummeted more than 1,000 points before ending the day down 588 points, or 3.6 percent, in its eighth-worst point decline ever. The Standard & Poor’s 500 sank 3.9 percent, putting it in correction territory, meaning it had fallen at least 10 percent from a recent peak. In Europe, Germany’s DAX index declined 4.7 percent, France’s CAC-40 slid 5.4 percent and Britain’s FTSE 100 lost 4.7 percent.

China’s declines reflecting the cooling of a market boom that was driven by official policy and cheerleading from the government press, rather than by economic fundamentals. The Shanghai index rose 150 percent beginning late last year even as the world’s second-largest economy was cooling, leaving little to support higher prices once investor enthusiasm faltered.

At Monday’s close, the Shanghai index was down 38 percent from its June 12 peak and just under 1 percent from its closing on Dec. 31. That meant the latest declines have wiped out this year’s gains.

Investors abroad are increasingly uneasy about China’s outlook, though there has been little change in forecasts and some areas including retailing still look relatively strong.

“Investors are overreacting about economic risks in China,” said Mark Williams of Capital Economics in a report.

“The surge in prices that started a year ago was speculative, rather than driven by any improvement in fundamentals,” Williams said. “A combination of poor data and policy inaction in China may have triggered today’s market falls but the bigger picture is that we are witnessing the inevitable implosion of an equity market bubble.”

In currency markets, the dollar gained to 119.8390 yen from Monday’s 118.6930 yen. The euro edged down to $1.1543 from the previous session’s $1.1591.

Oil rebounded from Monday’s steep declines.

Benchmark U.S. crude gained 24 cents to $38.42 per barrel in electronic trading on the New York Mercantile Exchange. The contract plunged $2.21 on Monday to close at $38.42.

Brent crude, used to price international oils, advanced 26 cents to $42.95 per barrel in London. It fell $2.77 the previous day to close at $42.69.

MONEY correction

3 Charts That Explain the Stock Market’s Huge Drop

The market closed 11% off its May peak Monday.

On Monday, the stock market entered what Wall Street pros term a “correction,” a decline of 10% or more from the market’s previous peak, which occurred in May. No one likes to see their portfolio knocked down a peg, but it’s not the end of the world.

Here are some stats to put recent event into context, and perhaps help you relax a little.

It’s been a surprisingly long time since stocks fell by this much.

The last time the market dropped at least 10% was in October 2011. That’s one of the longest stretches of uninterrupted growth since World War II. So you might say we were due; typically, there’s a market correction every 18 months.

Source: S&P Captal IQ

Most 10% drops don’t lead to bear markets.

Most of the 30-odd corrections the market has endured since 1946 didn’t deteriorate into a bear market, defined as a decline of 20% or more from the previous peak.


Just holding on usually solves the problem.

Usually, but not always, investors who waited out a correction found themselves quickly back in the black.

Source: S&P Capital IQ/Bloomberg

Read next: Why Bonds Soared After Monday’s Stock Market Crash

TIME stock market

Why Silicon Valley Is Getting Hammered by the Global Selloff

An investor stands in front of electronic board showing stock information at brokerage house in Shanghai
Aly Song—Reuters An investor stands in front of an electronic board showing stock information at a brokerage house in Shanghai on Aug. 24, 2015

Aging bull or emerging bear? Investors see larger problems ahead for big tech

Last week was a relatively quiet one for tech news. So why, in a week when the S&P 500 suffered its biggest decline in 18 months, were technology stocks being hammered especially hard?

The question takes on a new relevance as US markets brace for new declines. The real culprits behind Wall Street’s turmoil last week—primarily, tumbling Asian stocks and slumping commodity markets—only became worse over the weekend. Should tech investors brace for even worse declines ahead? The near-term answer seems to be that they should.

During the past five trading days, the S&P 500 index fell 5.7%. Overall, technology shares were hurt by the selloff even more, with the NASDAQ Composite Index—more heavily weighted with mid-sized and large-cap tech companies—down 6.7%.

The biggest names in tech suffered even worse declines than the NASDAQ. Microsoft fell 8.4%. Apple and Facebook both fell by 8.8% Yahoo fell by 9%. Twitter, already having one of its worst months in the stock market, fell 11%. Google was one of the few large-cap tech shares to fare better than the NASDAQ, but it still declined 6.6% last week.

None of these companies announced any grim development that could have triggered a selloff last week. Instead, they are caught up in a downdraft of selling that was triggered by events well beyond Silicon Valley—continued collapse of the Chinese stock market, the prolonged slump in global commodity prices, and the erosion of currency valuations against the dollar in emerging markets.

These days, the most successful tech companies are global enterprises, so it’s not surprising that they would be affected somewhat by turmoil overseas. After all, these external factors have been haunting tech companies for months. Weaker currencies abroad, for example, are tied to a strong dollar, which can erode overseas revenues of multinationals.

But even so, big tech had been seen as a safe haven amid the global turmoil. Yes, Apple has exposure to China, but Facebook and Netflix don’t. And besides, Apple and Microsoft offer the kinds of dividends investors seek out in uncertain times. And nearly all of them were promising years of growth from the business models they helped pioneer.

Hence the vexing question: Why would they be sold off more harshly than other sectors where multinationals dominate? Some of the easy answers aren’t satisfactory. Yes, trading is seasonally light in August, but these are some of the most actively traded stocks. Yes, some like Netflix are overvalued, but Apple and Microsoft have P/E’s of 12 and 16, respectively—below the S&P 500’s ratio of 20. So why has Apple officially entered bear territory?

There is another explanation, having more to do with what may be a shift in the mindset of investors who grew accustomed to expecting high-growth from tech companies. Currency crises and panics in large overseas markets may not have anything directly to do with whether Americans will buy more smartphones, but they can signal big shifts in financial cycles.

Nobody is sure yet whether what happened last week was a correction or the beginning of a new bear market. Corrections are unpleasant but usually temporary—and they are often necessary before promising stocks can advance higher. But a bear market, which the US stock market hasn’t seen in six years, would slow down revenue growth and potentially even the profits.

And that’s what’s most likely worrying investors. This is an old bull market, ready to be put out to pasture. And the overseas turmoil may be, if you’ll allow the mixing of metaphors, the straw that breaks the aging bull’s back.

In other words, the tech selloff last week may reflect a growing sense of nervousness among large fund managers that have been buying not just publicly traded shares like Apple and Google, but investing in private rounds of newer companies like Uber and Airbnb with an aggression never seen before in previous tech bull markets.

These private tech companies–called unicorns because a billion-dollar valuation for a private startup was once unheard of (although now there are 131 of them)–don’t have financial data available to public scrutiny. It’s hard to know which of them are even close to making a profit. Or, more crucially, whether they have enough cash to carry them to profitability should the economy slow down in the future.

Individual investors have been largely shut out of investing in these companies, but institutional investors like mutual or private-equity funds have bought into them on a scale that wasn’t even dreamed of during the dot-com boom. And after last week, those fund managers may be wondering if they overextended themselves in the tech sector by gorging on these private rounds.

If the selloff is more than a correction—that is, if it’s a true bear market—many funds could be left having to write down losses from these private investments when their valuations drop. And unlike stocks in the public market, privately held shares are much harder to sell because they are illiquid. Some funds may already be selling their public tech shares at a profit as a hedge against this risk.

A few venture capitalists have been warning about this danger for a while. Bill Gurley of Benchmark, a veteran of the dot-com crash, has been sounding for a while like the VC version of Cole Sear, saying he sees dead unicorns this year. Last week, noting the drop in tech stocks, he warned again that investors would soon shift their focus from revenue growth to profitability. Others joined him in predicting zombie unicorns.

These warnings are coming from VCs who, unlike the rest of us, are in a position to see the financial health of many private tech companies. The day may come when the small investors who were barred from buying shares in these so-called unicorns are glad they never had the chance. In the meantime, the mere prospect of dying unicorns seems to be scaring fund managers. Scaring them even more than what’s happening in China.

TIME Apple

Apple’s Stock Is Now Officially In a Bear Market

Apple store beside the West lake in Hangzhou , is the
Zhang Peng—LightRocket via Getty Images

And things could get even worse for Apple investors

Apple’s stock had a very bad day on Friday, ending the trading session officially in a bear market.

Apple was already down 16% from its April high before the market even opened, leading Fortune’s Chris Matthews to declare that the tech darling had “gone from the market’s biggest winner to one of its biggest losers.” But after Apple’s share price fell more than 6% during the day, they closed out the week down more than 20% from their 52-week peak, putting them in what market experts consider a bear market.

Apple shares peaked in April at $134.54, but have lately dropped amid an ongoing correction in technology and other high-flying stocks. Netflix shares are down almost 15% this week, for example, while shares of Disney fell almost 7%, as CNNMoney noted.

Indeed, even before Friday’s market-wide bloodbath began, some investors were warning of a “death cross” in Apple’s stock movement, a foreboding omen that could signal greater losses to come, according to MarketWatch. The last time the “death cross” showed up for Apple, the article cautioned, its shares fell 27% over the next four months.

MONEY consumer psychology

Probability Trumps Predictions When Making Forecasts

hand throwing dice
Colin McDonald—Getty Images/Flickr Select

Most of us don't think in probabilities -- but we should.

Statistician Nate Silver correctly predicted the outcome of every state in the 2012 presidential election. It instantly shot him to fame in a field most people associate with the most boring class they ever took. He’s been on The Daily Show twice. He has more than a million Twitter followers.

But the most important part of Silver’s analysis is that he’s not really making predictions. Not in the way most people think of predictions, at least.

You will never hear Silver say, “He is going to win the election.” You might hear him say, “He has a 60% chance of winning,” or “The odds are in her favor.” Pundits make predictions. Nate Silver calculates probabilities.

All probabilities of less than 100% admit a chance of more than one outcome. Silver put a 60% chance of Obama winning Florida in the 2012 election, which, of course, implied a 40% chance that he wouldn’t win. Silver’s pre-election probability map gave Obama the edge. But, had Mitt Romney won the state, it wouldn’t necessarily have meant Silver was wrong. In his book The Signal and the Noise, Silver wrote:

Political partisans may misinterpret the role of uncertainty in a forecast; they will think of it as hedging your bets and building in an excuse for yourself in case you get the prediction wrong. That is not really the idea. If you forecast that a particular incumbent congressman will win his race 90 percent of the time, you’re also forecasting that he should lose it 10 percent of the time. The signature of a good forecast is that each of these probabilities turns out to be about right over the long run … We can perhaps never know the truth with 100 percent certainty, but making correct predictions is the way to tell if we’re getting closer.

What set Silver apart is that he thinks of the world in probabilities, while the punditry crowd of coin-flipping charlatans thinks in black-and-white certainties. His mind is open to a range of potential outcomes before, during, and — most important — after he’s made his forecast. Things might go this way, or they might go that way. He adjusts the odds of certain outcomes when new information arrives. It’s the most effective way to think about the future.

Why don’t more people think like Nate Silver?

Twenty years ago, Berkshire Hathaway vice chairman Charlie Munger gave a talk called The Psychology of Human Misjudgment. He listed 25 biases that lead to bad decisions. One is the “Doubt-Avoidance Tendency,” which he described:

The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision.

It is easy to see how evolution would make animals, over the eons, drift toward such quick elimination of doubt. After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do.

In other words, most of us don’t think in probabilities. It’s natural to quickly seek one answer and commit to it.

If you watch financial TV, or read investing news, you will almost never hear someone say there’s a 55% chance of a recession this year. They say there is going to be a recession this year. Rarely does an analyst say there’s a 60% chance of a bear market this year. They say there is going to be a bear market this year. There’s no room for error. There are no probabilities. People want exact answers, and pundits are happy to oblige.

Consumers of financial news are part of the problem. Not knowing what the future holds is scary. But you don’t gain much confidence hearing someone say there’s a 60% chance of one outcome and a 40% chance of another. We are more likely to listen to a forecaster who uses unwavering confidence to insist they know the future. It’s like warm milk for our fears.

But thinking in certainties is usually a reflection of how you want the world to work, rather than how it actually works. Silver writes:

Acknowledging the real-world uncertainty in [pundits’] forecasts would require them to acknowledge to the imperfections in their theories about how the world was supposed to behave — the last thing that an ideologue wants to do.

If you have a view of the world that says raising taxes will slow the economy, no amount of information will change your mind. You won’t tolerate a claim of an 80% chance a tax cut could slow the economy, because it leaves open the possibility that your entire world view about tax cuts could be wrong.

One of the top reasons investors make mistakes is that the world works in probabilities, but people want to think in certainties. It’s why bear markets surprise people, banks use too much leverage, budget forecasts are always wrong, and most pundits make themselves look like idiots.

As soon as you start thinking probabilities, all kinds of things change. You’ll prepare for risks you disregarded before. You’ll listen to people you disagreed with before. You won’t be surprised when a recession or a bear market that no one predicted occurs. All of this makes you better at handling and navigating the future — which is the point of forecasting in the first place.

Here’s Silver again:

The more eagerly we commit to scrutinizing and testing our theories, the more readily we accept that our knowledge of the world is uncertain, the more willingly we acknowledge that perfect prediction is impossible, the less we will live in fear of our failures, and the more liberty we will have to let our minds flow freely. By knowing more about what we don’t know, we may get a few more predictions right.

Morgan Housel owns shares of Berkshire Hathaway.

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MONEY stocks

How to Tame the (Inevitable) Bear Market

baby bear in front of scary bear shadow
Claire Benoist

Stocks will eventually suffer a downturn, but don't assume it has to be a grisly one. Here's what you need to do now to get your portfolio ready.

The current bull market is looking almost old enough to qualify for Social Security. Now in its seventh year, this rally is nearly twice the length of the typical bull and is the fourth-oldest since 1900. Meanwhile stocks are getting expensive, profits are slowing, and equities will soon face another headwind in the form of Federal Reserve interest-rate hikes, possibly starting as soon as summer.

Yet this is not a call to hightail it out of the market. Few suggest a bear attack is around the very next corner. And even if a selloff is coming soon, two-thirds of bull markets over the past 60 years have added gains of at least 20% in their final stage, according to InvesTech Research. So there’s a risk to overreacting.

Money

That said, “how you invest in the seventh year of a bull market is not the same as at the start of a bull market,” says InvesTech president James Stack. And the next bear market is probably going to look a lot different from the ones you’ve grown used to.

So here’s a playbook for getting your portfolio ready:

Expect a less grisly bear

The last two downturns you recall happen to be among the worst in history, so it’s understandable if you’re concerned about getting mauled. But this time “we don’t see any bubbles or concerns that would suggest we’re heading for a repeat of 2000 or 2007,” says Doug Ramsey, chief investment officer at the Leuthold Group.

Ramsey expects a “garden variety” downdraft of around 27.5% (see chart). After a six-year rally in which the market has soared more than 200%, that’s not catastrophic. Also, it’s psychologically difficult to buy on the dips in a megabear that might drag on for years. But a run-of-the-mill bear market can be viewed as “an opportunity,” says Kate Warne, investment strategist at Edward Jones.

Warne’s advice: Plan to rebalance your portfolio to your target stock allocation in the next bear. Get ready to do so once your mix changes by around five percentage points. A 70% stock/30% bond portfolio will hit that point as equity losses approach 20%. Selling bonds to replenish your equities will set you up for the next bull.

Stay committed abroad

In the last bear, global economies tumbled in sync. Not so this time. In the U.S., the Fed is on the verge of lifting rates on the strength of our economy. Yet the eurozone and Japan are stuck in neutral, and their central banks are trying to stimulate growth. “Their stocks reflect that weakness, making them more attractive right now compared to the U.S.,” says Warne.

The broad U.S. market trades at a price/earnings ratio of 17.7 based on profit forecasts. Yet stocks held by Fidelity Spartan International IndexFIDELITY SPARTAN INTL INDEX INV FSIIX 0.03% and Dodge & Cox International DODGE & COX INTERNATIONAL STOCK DODFX -0.03% —both in the MONEY 50—trade at about 15 times earnings. Warne suggests keeping up to a third of your stocks in developed foreign markets.

Don’t overlook late-stage bull leaders

While the S&P 500 is trading modestly above its long-term average, the median P/E of all U.S. stocks is at an all-time high. “That tells you that small- and midcap stocks have higher P/Es, and they will be the ones to fall the furthest in a bear market,” says Stack.

That makes blue chips more compelling. InvesTech also studied the final stage of bull markets and found that the energy, technology, health care, and industrial sectors tend to outperform. Energy is obviously a tricky case given the recent volatility in oil prices, but Stack says it should not be shunned. MONEY 50 pick Primecap Odyssey Growth PRIMECAP ODYSSEY GROWTH FUND POGRX 0.42% has nearly 80% of its assets in those sectors.

Dial back on alternatives

If you’ve been using high-yielding utility stocks as bond stand-ins, now is the time to take some profits. Along with financial and consumer discretionary stocks, utilities are late-stage laggards.

And if you’ve reduced your fixed-income allocation in favor of higher-yielding alternatives such as REITs or master limited partnerships, it’s time to shift back to core bonds. Such income alternatives are more highly correlated with stocks than are basic bonds. Fixed-income returns may be muted once rates start rising. But that doesn’t change the role of high-quality bonds: shock absorbers when stocks are falling.

MONEY holiday shopping

13 Halloween Costumes for Finance Geeks

Actress Katie Seeley as a bear (left) and Sacha Baron Cohen as a bull (right)
Paul Archuleta/FilmMagic (left);Fotonoticias/WireImage (right) Combine a bear costume (as worn by actress Katie Seeley, left,) and a bull suit (see Sacha Baron Cohen, right) for a punny stock market couples costume.

Look like a million bucks—literally—with these creative costumes.

Still not sure what you’re dressing as for Halloween? Don’t despair. We’ve got a bunch of costume ideas that are right on the money. These finance-themed getups are accessible for a general audience (so you don’t have to spend your evening explaining, “No, the other kind of black swan…”), cheap, and quick to pull together.

For some tried-and-true ideas, you could go as Zombie Lehman Brothers, the London Whale, or characters from Dave Chappelle’s classic “Wu Tang Financial” sketch. Or you can try one of the more timeless 13 suggestions below. Then again, you could just dress up as prerecession government regulations and stay in for the night.

1. Money. Let’s be honest: Dressing as a giant bill or stack of bills is kind of boring. The concept is improved if your homemade costume is a reference to the “made-of-money man” in those Geico ads—or if you are an adorable baby swaddled in a sack of money. (Mom and Dad, throw on a mask and a badge, and voila! A cop-and-robber duo.)

2. A market crash. If Halloween season sneaked up on you like the October stock swoon did on traders, you can craft a “market crash” costume in five minutes by taping a fever line on a t-shirt with some masking or electrical tape. Use light-up accessories, and you’ve got a flash crash. This costume can be modified for a couple or group—just extend the fever line across your torsos—and it pairs nicely with a “broke broker.”

3. The Federal Reserve Chair. Mimic Janet Yellen’s signature white bob with a wig and her go-to outfit with a black blazer over a black dress or pant suit. Don’t forget a gold necklace. If people ask who you’re dressed as, throw fake money at them and yell, “Loose monetary policy!” To turn this into a group costume, grab yourself a Ben Bernanke and Alan Greenspan. Wear matching “chair” shirts for solidarity.

4. Bull & Bear (couples costume). Like salty-sweet snacks and Brangelina, this costume combination is greater than the sum of its parts. Relatively inexpensive store-bought costumes are easy to find, assuming you don’t want to spend hundreds of dollars, or you can always build a DIY ensemble with homemade horns and ears. Hang little signs with upward and downward trending fever lines around your necks for extra clarity. The only hard part will be deciding who gets to be which animal.

5. “Bond” girl. Personify this pun by dressing as your favorite 007 lady-friend and adding a hat, sign, or other accessory that reads “T-Bill” or features an image of a (now-technically-obsolete paper) Treasury bond. Jill Masterson’s “Goldfinger” look might be most recognizable: You can do it with gold spandex or body paint.

6. Wolf of Wall Street. See bull and bear, above. You just need a suit and tie, a wolf mask, and pockets brimming with fake money. And maybe some fake Quaaludes.

7. Cash cow. Unless your name is actually Cash (like this little guy), channel the Daily Show’s Samantha Bee and decorate a cow suit with dollar symbols.

8. A mortgage-backed security. This one might seem a little 2007, but there’s evidence these investment vehicles are coming back in vogue. Start with a shirt that says “security” in front. If you’re handy, you can then turn a small backpack into a “house” and wear that around. If not, just write “mortgage” on your back, and you’re done.

9. Gross domestic product. Just wear a “Made in America” t-shirt covered in dirt and fake blood.

10. Dogs of the Dow (group costume). Grab up to ten of your friends and dress as dogs. Wear tags with ticker symbols for each of the current Dogs of the Dow.

11. Distressed securities. Similar to #8, start with a shirt that reads “securities,” then layer on some dramatic makeup, to make yourself look, well, distressed.

12. Naked position & hedge (couples costume). This idea is pretty inside-baseball, but will be a fun challenge for your finance-savvy friends to guess at. The person dressed as the “naked position” can wear flesh-toned spandex, while his or her partner dresses like a hedge, as in shrubbery. Here are DIY instructions.

13. Spider / SPDR fund family (group costume). This one is pretty easy, since instructions for homemade spider costumes abound. You could go as a solo arachnid, with “ETF” painted across your chest, but dressing up is always more fun with friends. In a group you can each represent different funds; for example, the gold fund spider can wear a big gold chain and the ticker symbol GLD, and the high-yield bond spider can glue candy wrappers and bits of tinfoil all over himself and wear a sign that says JNK.

MONEY

What To Expect From This Crazy Market

Sharp one-day drops in the market can be unnerving, but they haven't changed the basic math of investing.

You know the advice: Ignore stock market swings. They don’t mean anything. Just buy and hold.

Of course, that’s easy counsel to live by when the swinging is mostly upwards. It’s even possible to follow such advice after a long market decline, once you’ve gotten used to the bad news. And near the bottom, when even the pessimists start to express some optimism, well, then it’s fairly easy to stay the course.

Times like now, however, are a true test of a long-term investor’s resolve. After a bull-market run so smooth that pundits were complaining about “complacency,” the Dow has delivered a string of triple-digit daily drops, confusingly interrupted by a 274-point rally last Wednesday. At such times, your head is saying no one can reliably predict the market’s next flush of fear or greed. But your gut worries that maybe something’s about to break.

The reality, though, is that if you look at the factors that really drive the long-run returns you care about, the market doesn’t look much different than it did a week ago. Which is to say: It’s priced to deliver kind of meh returns. But those returns still look better than your easiest alternative, bonds.

There’s a very simple Finance 101 way to think about what you’ll make on equities. In essence, a stock is just a claim on the flow of cash from a company. You can think of that as the company’s earnings, or—if you want to keep things tangible—as the dividend checks it pays to investors. (No, not all companies pay dividends, but in theory that’s the eventual purpose of all profits.) Right now, investors who own an S&P 500 index fund get paid a dividend yield of about 2% per year.

The nice thing about a dividend yield is that it’s not just a measure of how much income your investment is delivering to you. It can also tell you whether stocks are generally cheap or expensive. Imagine that a stock paying out $2 in dividends per share is trading at $100—that’s a 2% yield. Now say it falls in price by $35. Terrible news for current holders, but potential buyers can now get the same $2 payout for just $65 a share—a 3% yield. In that light, the stock looks like a better bargain.

So: Low dividend yields suggest pricey stocks, and higher dividend yields cheaper. Right now, even after the recent declines, dividend yields look okay but not fat, just as they have for a while:

ycharts_chart-14

Note that the almost 4% dividends came in 2009, when stocks were at the bottom of the post-crisis crash. Around 2000, at the peak of the tech bubble, yields were about 1%.

Wait, does all this mean I’m only getting a 2% return on stocks? No, it doesn’t, because you also buy stocks expecting their earnings or dividends to grow over time. Using a somewhat simplified, classic rule of thumb — I’m relying on Bill Bernstein‘s book The Investor’s Manifesto plus this useful paper (PDF) from the money managers Research Affiliates — the expected return on stocks right now is the 2% dividend yield plus the historic rate of growth in dividends or earnings-per-share of about 1.5%. So think 3.5%, maybe 4%.

That’s a real return above inflation, but still a disappointment compared to the 7% historic rate for equities since 1926. Then again, it’s much better than the fixed-income alternatives: The real yield on inflation-adjusted Treasury bonds, or TIPS, is 0.35%.

A 4% return is just a baseline. If investors collectively decide they want to value stocks higher in the future, and can live with lower yield payouts, you’ll get a bump on your investment today. If they lose their taste for the risk of stocks, you’ll do worse. But that’s driven by whatever goes on deep inside the wet, gray stuff under millions of investors’ skulls, not the profitability of the companies you buy today.

The past six market days have hardly nudged this math, except to move it slightly toward stocks being a better bargain. Before the start of last week, the S&P had a one-year total return of more than 18%. Now it’s one-year return has tumbled to 12%. That’s disappointing and, yes, anxiety provoking. But if you see 4% annual return as your basic expectation, reversals from years of high gains should come as no great surprise.

MONEY stocks

5 Ways To Tell If There’s More Trouble Ahead for Stocks

Is Monday's triple-digit loss the start of something worse — like a bear market? Here are five things to watch for in the coming days and weeks.

On Monday, the Dow Jones industrial average sank more than 223 points, marking the fifth straight day of triple-digit moves in the closely watched benchmark.

Technically, this is just a “pullback,” which is loosely defined as a drop of around 5%.

^SPX Chart

^SPX data by YCharts

The S&P 500 index has yet to reach a correction, or a 10% plunge. And the broad market is nowhere close to bear market territory, which is a sustained 20% decline in stock prices.

Still, as MONEY recently pointed out, this bull market is starting to show its age. So it’s hard not to wonder if a bear is lurking.

If you’re worried there are more troubled days ahead for equities, here are five things to watch for in the coming days and weeks:

1) Are companies reporting disappointing earnings results?

“I’d be listening to and watching third-quarter earnings reports,” says Liz Ann Sonders, chief investment strategist at the brokerage Charles Schwab.

Why? First, some companies face a new headwind in the form of the stronger dollar. While the strengthening U.S. currency is a sign of global confidence in the U.S. economy, it creates problems for American businesses. A mighty dollar makes it harder for U.S. exporters to sell their goods competitively overseas, which could crimp corporate earnings growth.

Robert Landry, a portfolio manager for USAA, put it this way:

We’re paying attention to whether companies beat, meet or fall short of revenue and earnings estimates. According to FactSet, average sales growth for the S&P 500 is expected to be 3.6% year-over-year and profit growth at 4.6%. The latter number is roughly half of where expectations stood back in late June.

What’s more, many investors think the stock market — at least prior to this sell off — was getting ahead of itself this year. Indeed, the price/earnings ratio (a common measure used to gauge market valuations) for the S&P 500 index had shot up higher than 18, based on the past 12 months of profits. That’s compared to an historic average of around 15. To justify those higher-than-average P/E ratios, investors want to see higher-than-expected earnings growth rates. The volatility of recent days suggests a worry that the bar’s been set too high.

2) Are commodity prices sliding?

The selloff in blue chip stocks recently has “coincided with mounting evidence of a global economic slowdown,” says Edward Yardeni, president and chief investment strategist at Yardeni Research.

Indeed, the reason why the dollar has been strengthening in the first place is that while the U.S. economy has been improving, Europe and Japan are both perilously close to slipping back into recession — for the third time since the start of the global financial panic.

Yardeni adds that global slowdown fears have grown in recent days as industrial commodity prices, including crude oil, have dropped sharply. (This isn’t a big surprise: Slower-than-expected growth in Europe, China and Japan has led to weaker demand for things like steel, copper and oil.)

David Kelly, chief global strategist for J.P. Morgan Funds, notes that Europe is set to release industrial production figures for August this week, along with data on inflation trends. If there’s even a whiff of deflation in the Eurozone — led by tumbling commodity prices — expect another bout of handwringing on Wall Street.

3) Are small stocks getting mauled?
While investors typically pay more attention to large blue-chip stocks, shares of smaller companies can be a harbinger of things to come for the broad market. Why? Because of their size, tiny stocks tend to be more volatile in general and the underlying companies are more easily rattled by changes in the economy.

The bad news is, the market’s tiniest publicly traded companies are already in a correction, as measured by the Russell Micro-cap Index. And should they slide into an official bear — which could be just days away — things could get really dicey on Wall Street.

^RTM Chart

^RTM data by Charts

Sam Stovall, U.S. equity strategist for S&P Capital IQ, noted that there have been 10 calendar years that small stocks have declined in price since 1979. “Of those 10 times,” he said, nine of the S&P 500’s 10 annual returns were 3.5% or less, and six of the 10 years were negative.” What’s more, for all 10 observations, “the S&P 500 posted an average annual price decline of 4.6%,” he said.

4) How is the Nasdaq composite index holding up?

Another canary in the coalmine for the broad market, according to market observers, is the Nasdaq composite index. Relative to S&P 500 or the Dow, the Nasdaq tends to be made up of slightly smaller, faster-growing and economically sensitive companies. In fact, technology stocks still make up around 45% of the index.

This is why in years when stocks slip, the Nasdaq tends to skid further. This happened in 1994, 2000, 2001, 2002, and 2008.

So far this year, the Nasdaq is close to entering into a correction. Should the Nasdaq’s 8% loss expand to 10% or more, look for more volatility in the S&P and Dow.

^IXIC Chart

^IXIC data by Charts

5) Is China’s economy growing less than 7%?

Continuing worries about China have contributed to the recent sell off in stocks. China’s economy, which had been growing as fast as 9% in 2012, slowed to 7.5% in the second quarter. That figure is expected to fall even further, to 7.3% in the third quarter. Some economists, in fact, are bracing for 7% growth or below.

Why is this important?

Brian Jackson, China economist for IHS Global Insight, notes that China’s leaders “signaled somewhere between 7% and 7.2% as a ‘bottom line’ for growth to meet job creation needs; IHS estimates that 7.2% is necessary to generate the roughly 13 million jobs annually to satisfy new job market entrants.”

Should GDP growth slip below 7%, policymakers in China may have start thinking outside the box. And Wall Street hates the unexpected — especially when it comes to governments and economic policy.

MONEY stock market

7 Years Later, Is the Bear Stalking Again?

Grizzly Bear
Scott Markewitz—GalleryStock

While the start of the 2007-2009 bear market now seems a lifetime away, there are a number of similarities between this market and that one that makes it hard to forget.

Exactly seven years ago today, the stock market fell into the worst bear market this side of the Great Depression.

The crash, which unfolded from Oct. 9, 2007 to March 9, 2009, obliterated more than half of the total value of the U.S. stock market and threatened the very existence of iconic companies from General Motors to Merrill Lynch.

Of course, all of this seems like ancient history now that the stock market has fully recovered — and then some.

^SPX Chart

^SPX data by YCharts

After the fourth-longest bull market in history, the Dow Jones industrial average and the S&P 500 are both near all-time highs. The housing market is slowly but surely recovering. And the U.S. economy has recently been growing at an annual rate of 4.6%.

Sounds like a totally different scene than seven years ago, when the economy was about to slip into a recession, the housing market was melting down, and the global financial panic was at full tilt.

Yet if you start digging into the details, there are a number of glaring similarities between today’s market and where Wall Street was on this fateful day seven years ago.

The bull market is aging. The stock market rally was an older-than-average five years old on Oct. 9, 2007. On Oct. 9, 2014, the bull is an even-older-than-average five and a half years old.

The market is starting to look its age. One way to tell if a bull is losing steam is to see how many stocks are actually participating in the rally. In 2007, the percent of companies in the S&P 1500 total stock market index that were outperforming the broad market fell to a lower-than-average 35%. Today, it’s even lower at 30%.

The market is pricey. The price/earnings ratio for the S&P 500, based on projected corporate profits, stood at 15.2 on Oct. 9, 2007. Today, that P/E ratio is an even-higher-than-average 16.2.

The market is pricey, part 2. There’s another way to measure the market’s P/E, using 10 years of average profits. In October 2007, the S&P 500’s so-called Shiller P/E stood at 27. That marked one of only four sustained periods in history where this P/E ratio climbed and remained above 25. Today, the market’s Shiller P/E is at 26.

Since 1926, whenever this measure has exceeded 25, the average inflation-adjusted annual return for stocks has been a mere 0.5% over the subsequent decade. By contrast, the historic annual real return for stocks is closer to 7%.

Greed is back. Seven years ago, merger & acquisition activity in the U.S. hit a record high, as risk-taking returned to Wall Street. Today, M&A activity, based on the total number of deals, is on pace to be even higher.

Confidence is back. When company executives are confident that the market isn’t fully appreciating the strength of their business, they initiate stock buybacks of their company’s shares, on the theory that their own stock represents a good value. The Wall Street Journal recently reported that stock buybacks totaled $338 billion in the first half of this year. That marked the highest level of activity in any six-month period since 2007.

Risk-taking is back. You know investors are getting aggressive when they’re willing to use borrowed money to make their bets. The last times margin loan debt as a percentage of GDP exceeded 2.5% were in 2000 and 2007. Well, today, it’s back above this threshold.

Does this mean that the bull market is about to end? Not necessarily. These are signs of an aging bull, not necessarily precise predictors of when the market is about to turn. Still, after growing accustomed to seeing stocks go up and up and up for several years, it’s time to reflect on how scary the market can be when investors grow complacent.

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