Saturday, January 25, 2014
Stock Market: The Correction - A Sinister Song In The Clouds?
Many had been praying for this correction. The S&P 500 had risen smoothly 17.5% over 142 trading days since the last 5% pullback, representing the third longest winning streak since 2000 (financialpost).
According to the media the recent sell off was triggered by the meltdown of emerging market stocks and disappointing economic news from China. Stock markets from India to Brazil have been under pressure spooked by fears that the tapper (the U.S central bank is winding down their massive bond purchases) might raise interest rates which could hurt the already fragile emerging economies. And on Thursday China reported a surprising slow down of their manufacturing growth, nursing fears the world’s second-largest economy could cool to much. But on Friday interest rate dropped sharply (good for emerging markets?) and the stock market in Shanghai closed with a plus of 0.6% and gained around 2.5% for the whole week. So what?
I believe the selling didn´t had any fundamental causes. It was rather just one of the usual hiccups that accompany every rally, a phenomena of mass psychology & weird herding behavior - just a sad "#song in the clouds".
Therefore I reckon that this correction will be short lived and moderate and not the end of the bull market as the perma bears (Roubini, Faber, Shiller & Co.) want to make us believe.
I am encouraged by the now running earnings seasons (companies are reporting their Q4 numbers) has started encouraging. Of the 102 companies in the S&P 500 that have reported earnings to date for Q4 2013, 63% have reported earnings above analyst expectations (marketwatch). On a market-capitalization basis, weighted earnings of S&P companies that have reported so far grew 10%, above the 8% in the third quarter (marketwatch). Next week we expect numbers from Amazon, Apple, Caterpillar, Facebook, ExxonMobil, Google and more.
Rising company earnings (and profit margins) have been driving the rally since spring 2009. The recent earning season is backing my view that we are in a new industrial & technological revolution. As I had explained in a recent block post (driveby) technology will generate rising profits for years and thus financing a secular bull market. And the recent correction will be forgotten soon.