Is This The Start Of A Market Correction?
US equities are finally experiencing a legitimate selloff after what’s been a very mundane summer. In fact, the major indices dropped yesterday the most since the market sold off in April.
The VIX also jumped above 17 for the first time since April’s volatile period. However, it’s hard to classify any VIX level below 20 as “volatile”. Perhaps “more volatile than it has been” is a better way to put it.
So what’s causing the sudden spike in investor fear?
After months of various international flare ups, the instability of the geopolitical landscape is apparently catching up to investors.
The biggest hot spots remain Ukraine/Russia and Israel/Gaza, but those regions may not be the most worrisome to US investors. For one, the debt issues with Portugal’s second largest banks are raising red flags. Plus, Argentina’s potential debt default isn’t helping matters.
Ultimately though, the political tensions with Russia and fears of a global economic slowdown are causing the most amount of concern. Many US companies are still reliant on oversea sales for a meaningful portion of their revenues.
Here’s the thing…
Despite rising concern among investors, the markets are really not in bad shape. Yes, some valuations are a bit stretched. But, by historical standards, most stocks are still reasonably priced.
More importantly, the US economy continues to look better and better.
GDP for the second quarter came in at 4% – much higher than expected and a huge reversal from the previous quarter. Meanwhile, the Fed is holding to its pledge of keeping rates low even while the central bank is seeing economic improvement.
The job market is also improving at a substantial rate. The unemployment rate climbing from 6.1% to 6.2% for July is actually a good sign because it means more potential workers are joining the labor force.
Moreover, I didn’t even mention all the very strong earnings results so far. Many of the most important companies reported encouraging quarters.
Still, I’m not suggesting you should completely write off this week’s pullback. It’s not a bad time to put on some portfolio hedges (such as SPY puts) just in case the fear level amps up a bit further.
Overall though, I believe this is nothing more than a blip. There are still plenty of reasons to be bullish on stocks.
Yours in Profit,
Gordon Lewis
Category: Breaking News
