My gut told me the downturn in the markets over the last three weeks suggested it was the start of the market correction that all of us expect. You only have to glance at this chart of the S&P500 over the past 20 years to conclude it is inevitable. However…
Here are comments from someone far better attuned to the markets than I am who suggests there is still a lot of upside left. I guess it just means the inevitable downturn will be more dramatic and painful. You had better have a parachute when it happens.
October 17, 2014 / Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer, Guggenheim Partners
After a volatile week in markets, U.S. equities are now oversold and investors should be alert for seasonal factors that should soon turn positive.
The yield on 10-year U.S. Treasury notes this week broke below 2 percent intraday for the first time since June 2013, fulfilling a view I expressed in commentaries published in September 2013 and again in August. With this yield achieved, I don’t see an imminent rise in rates and view market talk about possible continuing quantitative easing by the Federal Reserve as overblown.
The recent decline in yields has less to do with U.S. economic fundamentals, which remain sound, and more to do with technical forces driving rates lower as a result of capital flows out of Europe. With inflation expectations falling, U.S. 10-year Treasury yields still look attractive even at close to 2 percent, relative to comparable German bunds at around 80 basis points and Japanese sovereign debt at around 50 basis points. In reality, U.S. long-term yields should continue to be well supported, with limited room to rise higher and the possibility that they could move lower.
In U.S. equities, the market is going through its usual seasonal gyrations and now appears to be oversold. The seasonal patterns of higher volatility in September and October that we anticipated have largely been fulfilled and seasonal factors should shift dramatically over the next two months. The buy signal for stocks normally coincides with the first game of baseball’s World Series (Oct. 21 this year), and between then and year end we will likely get a U.S. equities market rally.
The S&P 500 Index today reminds me of 2003, when stocks fell 4.2 percent in September before strong data pushed stocks 15 percent higher by June of 2004. The S&P then lost about 7 percent between June and August of 2004, when the Fed hiked interest rates, before gaining more than 15 percent in the next year.
In the coming months, a number of indicators will offer signals about how long the rally in U.S. stocks and bonds that began in 2009 can continue. One such indicator will be the so-called Santa Claus rally. As the old adage goes, “If Santa Claus should fail to call, bears may come to Broad and Wall.” While it is too early to say, the coming rally in U.S. equities may be the one to sell into.