Take A Xanax And See Me In About A Month…
Yesterday, the market had a particularly tough day. We here at Sachem Rock, believe worldwide markets may have finally started a “correction” in equity prices that we believe is overdue. Actually, last Friday was likely the day the market may have kicked off the correction that only a passage of time will confirm.
In recent days, economic data has been released that indicates that the world economy was not quite in as good a shape as the performance of the equity markets would lead you to believe. We have had concerns about the worldwide economy and the markets in our last couple of blog posts. More specifically concerns about weakness in China indicated by the Chinese PMI (“Purchasing Manager’s Index”) during the first two months of 2014.
Yesterday, after an encouraging US Initial Jobless Claims Report of 300,000, the Chinese government released export data indicating increased weakness in the country’s export markets (US, Europe, Pacific Rim), and then the rout was on…
Another significant factor contributing to the likelihood of a correction is the slight increase in corporate profits during 2013 (6-7%) compared to the broader equity market increase in value of over 29%. We referenced this in our last blog post, and have been concerned about this since late last year. This phenomenon cannot continue indefinitely. Earnings season started on Monday with Alcoa, and many of the subsequent earnings reports and guidance released this week were not optimistic about strong future growth in profits.
We believe the market will trade lower over the next several weeks at least, and a correction of at least 10% is in the offing. We do not believe that a 2008 style collapse in equity prices is a significant possibility, unless current geopolitical tensions in Europe result in a ground war with NATO participants.
Despite the recent volatility, we see no cause for panic at this time. While hedges are more expensive this morning, than last week, we advise investors to continue to shore up their protection against downside risk. The market seems to have more strength today, but it may just be the “short sellers” taking some profits. Great investments two weeks ago, despite the recent volatility, will still be great investments for the future.