A sharply negative Thursday again raised fears of a gathering economic storm.
A bull market ending this early would be unprecedented.
Market recoveries aren't smooth—and gyrations along the course can easily spur emotion.
The emotion associated with corrections often cause folks to seek confirmation in data, no matter how narrow or short term.
Widely-known negatives today frequently obscure a brightening present and future economically.
Stocks were sharply lower on Thursday, with the S&P 500 finishing the day with a loss of -3.90%. The markets globally have fallen for the majority of the last month—stoking fears that after a tremendous run, thanks to the contribution of EU debt woes, the rally is done. Certainly, steep near-term volatility is painful, but recent market action is much more characteristic of a typical bull market correction than the start of another sustained downturn. (Go here for an in depth look at why we believe EU debt shouldn't derail the current bull market.)
First, it would be unprecedented for the bull market to retire this early. Second years following a major bear market bottom are overwhelmingly positive. But that doesn't mean the road should be smooth. Bull markets never run up smoothly. Corrections are common even in strong years—which we see today. Never forget, for US investors, pain of loss is over twice as intense, on average, than pleasure of gain. (Recall Y2K?) And undoubtedly, folks still battle-weary from 2008, may look for views and news, whether consciously or unconsciously, to confirm their fears. It's just natural, though it's not indicative of the health of the larger stock market rally.
For example, after a string of 12 consecutive positive months, Thursday's release of US leading economic indicators (LEI) dipped in April by -0.1% m/m. Does that confirm fears the economy is double-dipping? Not at all—it's normal to see an occasional negative m/m report even when expansion is young. For example, January 2005, March 1993, and December 1991, all posted slightly negative m/m LEI after long runs dominated by gains (-0.1%, -0.5%, and -0.3% respectively).[i] Anyone recall the great recession of 2005? Of course not—they were anomalies!
Further, like all indicators, the LEI is imperfect and shouldn't be used on its own as a market or economic bellwether. The LEI is comprised of ten statistics—some subject to temporary distortion and others just plain flawed. In this case, two of the primary negative contributors—building permits and money supply (M2)—both were impacted. Building permits due to spotty weather earlier this year, and money supply, while down, is declining from a hugely elevated base. Further, the LEI series contains consumer expectations—the famous Univ. of Michigan survey regarding how consumers feel about spending. As we've covered previously, how people say they're feeling today isn't reflective of how they spend tomorrow—it's a reflection of the past. Plus, the report's a tiny data sample—one month's information following over a year of positive reports. Assessments of economic health need to be based on more than one indicatory and more a month's data.
Today's negatives are incredibly well known—front page fodder. We've covered here repeatedly over the past few weeks those powerful positive fundamentals that get little play. A wise man once said it's best to be fearful when others are greedy, and greedy when others are fearful. We buy that, mostly, though we would caution against knee-jerk contrarianism. But it is true when folks are panicking most, a lot of that fear is already cooked into stock prices, and it's an appropriate time to stay calm and remember you're investing for the long-term, not to avoid a few weeks' volatility.