Is the Sky is Falling?
Some “bad” news came in yesterday, and the reactions, or I think better put, overreactions, caused a market correction. The Dow fell 3.3%, the S&P 500 fell 3.5% and the NASDAQ fell 3.9%. The last drop this big was on March 24, 2003, an unusually long period of time. Before that, big one-day falls were more common. Between 1997 and 2003, there have been 11 drops equal to or larger than yesterday’s. The “news” supposedly triggering the fall was: a 9% drop in the Chinese stock market overnight, newspaper headlines reporting (incorrectly) that Alan Greenspan said a U.S. recession is likely this year, and a large 7.8% drop in new orders for durable goods in January. I believe all three news items are not particularly important.
Let’s start with China. Yes, they are tightening up on their economy and banking sector a bit, but a 9% drop in this red-hot market is, in my opinion, a drop in the bucket. Over the last year, that market shot up 124%, and when a market shoots up this way, investors tend to be ready to sell—taking their gains—at the first sign of market risk. (It recovered 3.9% last night.)
Regarding the now infamous headlines claiming that Alan Greenspan thought a recession likely in 2007, let’s just look at what he actually did say:
While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting (growth) forward into 2008 …with some slowdown.
It is very hard to twist this into “Greenspan predicting recession”, but reporters managed to do it. In a broad-ranging discussion, Greenspan also called the global economy “benign and stable,” and said the U.S. and global economies are far more resilient now than before to economic and financial shocks.
Finally, there was the Durable Goods Advance Report for Manufacturing. This report shows a 7.8% drop in new orders in January; swings of similar magnitude happen fairly often (twice last year ’ January and October), and in my opinion, are not important. This same report shows other data that I view as more important at present ’ a record high backlog of unfilled orders and the ratio of inventories to sales, up a bit recently, but bouncing off of an all-time record low. I see a huge backlog of orders still to fill and low inventories that are more likely to push production up, not down.
My reading of the economy, and Greenspan’s, is that a recession is unlikely this year. I think that overall the U.S. equity market is in good shape. That said, I do think we are in the midst of performance rotation, and I worry about some of the high-flying asset classes and sectors. As always, please call me with any questions or concerns.
Author Contact Info:
Casey Broach
http://www.lpl.com
858-560-0366
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