Last week the Dow industrials dropped as much as 460 points before retracing, and the U.S. 10-year Treasury yield broke below the 2% threshold - its biggest swing in five years. The markets could be in for rough sledding.
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So what should investors do? Use our check list of the half-dozen things investors should do, and know a few facts first, based on what the trading desks on Wall Street are telling FOX Business.
Housing is sticky, so sticky slow is the recovery. However, the quarterly GDP report functions not just as an MRI scan on the health of the U.S. economy, but of D.C. policies, too. GDP continues to show slow 2% growth, historically low given prior, better performance after recessions. D.C. policies continue to be a self-inflicted wound, built on a welter of anti-competitive tax increases and rules that take money out of pockets to recycle it back to the economy through the massive, inefficient machine known as the federal bureaucracy.
The U.S. financial markets have gotten ahead of the economic recovery - we are not in the immaculate recovery the White House likes to tout. Too many rainbow spotters were blowing sunshine, abetted by the Federal Reserve which appears to have added stock price inflation to its dual mandate of price stability and jobs. Even though the Federal Reserve said it would stop buying government debt and asset-backed securities, just look at the Fed talk recently about stepping back in to do more bond purchases even when Ebola weighed on stocks.
Moves by central banks around the world helped the markets levitate higher over the last five and a half years without a correction. We haven’t seen normal market action since 2007, given the handholding, which means, at times, a white-knuckled ride. Still, it is always the case the Federal Reserve could come back in and continue buying bonds to support the markets, meaning it could still operate “an open bar for the fiscal drunks in Washington,” economist Ed Yardeni has said.
Currently, market experts say it’s unclear whether the markets already have rung the bell at the top. One interesting theory comes from Goldman Sachs’ David Kostin, an idea which indicates a possible bull run in the last two months of the year. Reason: Stock buybacks. The theory goes that companies are restricted from doing stock buybacks in the five-week period before reporting earnings, which is why he thinks the S&P 500 topped out at its all-time high on Sept. 19, then dropped. But he says companies will pick up doing buybacks again in November and December.
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Kostin says: Buybacks dip during earnings reporting months, which have seen 1.2 points higher realized volatility than in other months during the past 25 years.” He adds: “We expect companies will actively repurchase shares in November and December. Since 2007, an average of 25% of annual buybacks has occurred during the last two months of the year.” That’s when company pay is often decided too, higher stock prices means higher stock-based pay.
For now, with volatility back, the short sellers are out in force. Like lizards, they’ll always eat what's in front of them, as one analyst said. Worsening the choppy action is continued bad economic news out of Europe, facing a triple-dip recession and deflation, also a slowdown in China. So, here’s what you should watch out for.
- Take a breath, understand market trends: In less chaotic times, the earnings season is at the top of traders’ radar screens. But macroeconomic concerns, Mideast and Russian tensions, plus the botched Ebola response adds to the crisis of confidence - the worst since the European sovereign debt meltdown had investors running for the exits in 2012. As economist Yardeni notes, a calm, sober look at market trends is helpful. The S&P 500 index is down 5.2% since its record high on September 18, and up 3.1% year to date. This is the first dip that has retested the index’s 200-day moving average since late 2012. The index stayed above its 200-day moving average for an historic 475 days. That was fun, right?
- Watch the transports, other anomalies: Even though oil is in free-fall, in a record drop, the S&P 500 Transportation index is down 7.6% from its September 18 record high, just 2.1% above its 200-day moving average, and up 8.7% year to date. That’s not a whopper of a performance. The transports should be up more, given the oil plunge lowers fuel costs. This signals more weakness ahead. Same for the defense sector. It’s flat, even though geopolitical tensions are on the rise. A cursory read says this is likely due to defense budget cuts around the world, which could do a 180 if conflicts break out. But watch out, defense contractors are major manufacturers, they make other things besides military hardware and software that companies use, so they are exposed to global slowdowns.
- Watch the tech sector and the mid-to small cap stocks: The Nasdaq had dipped back to its 200-day moving average. It is down 15.3% from its recent high and up 2.4% year to date, to the lowest level since June 5. The Russell 2000 is 8.4% below its 200-dma, and down 9.5% year to date, to the lowest reading since October 10, 2013. It is down 12.9% from its record high on March 4. The little guys are always the canaries in the coal mine to economic growth concerns - or blastoffs.
- Keep emotions out of your stock calls: Like everyone else, you might want to ditch stocks to grab cash if you see the markets go through a gut-clenching dive. That’s human. But count to ten. Then check to see how your investments performed during boom and bust cycles in the markets over the past one, three, five and 10 years.
- Check your asset allocation: Make sure you’ve split your portfolio between stocks, bonds, and cash. That way, you’ll have decent, broad breadth exposure that will pick up long-term growth while providing a cushion against market downdrafts. Your financial needs, age, and family circumstances are factors here in figuring out your personal risk tolerance and financial goals. Make sure you realign your asset allocation periodically, to ensure that you are not overweight in stocks or bonds given market action. Protect your retirement nest egg, figuring on a payout schedule of 20 or 30 years.
- Ask your friends for recommendations for a financial professional: That person can be your sounding board if you’re worried you’re overreacting or being too cautious. But watch out for churn, if they start picking and choosing too frequently which sectors or securities you should invest in, or use market volatility as an excuse, make sure they’re not trying to suck fees or commissions out of you.