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5 Things You Need to Know About the Selloff 

Kristina Hooper 

The Upshot 

4/14/2014 

Kristina Hooper puts the sharp pullback in the stock market in perspective for investors who may be wondering about a correction.
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Kristina Hooper, US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

A lack of confidence can be a rally killer, but so can success. What we’re seeing in the stock market lately appears to be less about eroding fundamentals and more about the maturity of the bull market.

The release of the FOMC minutes was the big economic highlight last week. While the minutes underscore the Fed’s commitment to stay looser for longer with monetary policy, stocks continued their recent slide. Here are five things to consider as we look to put the market selloff in perspective:

1
The Fed hasn’t changed its accommodative monetary policy stance. In fact, the latest FOMC minutes suggest that the Fed is more dovish than many market observers thought just a few weeks ago, when investors focused on a few words from Chair Janet Yellen’s press conference. However, the Fed has since stressed that it understands that the US economic recovery remains slow and flawed, which means that the central bank needs to remain very accommodative and stay “behind the curve’ in order to support economic growth.
2
Recent economic data point to progress. While the pace of that progress may not be as swift as expected, there’s been some clear improvement. For example, initial jobless claims for the week ended April 5 were at their lowest level since 2007. Retail sales for March rose 1.1%, beating expectations and the previous month’s growth, presumably on pent-up demand created by bad weather. And the March ISM manufacturing index clocked in at 53.7, which, while below estimates, topped the February reading and keeps manufacturing activity firmly in expansion territory.
Warming Up Chart


Further, these encouraging numbers were supported by most FOMC members, who said that bad weather “held down economic activity during the early months of the year.’ It now appears that the US economy is rebounding from the harsh winter. We can see this most visibly in the US economic surprise indices that hit a trough at the end of February.

3
The selloff is likely technical and shorter-term in nature. The selloff hasn’t been caused by a deterioration of fundamentals and has largely been contained within a few sectors. While we don’t know what’s causing it, we do know it hasn’t been accompanied by a significant widening in credit or swap spreads. Plus, the VIX, while moving higher, is still relatively low from a historical perspective. All this suggests that investors aren’t panicking and there’s no widespread contagion.
The selloff hasn’t been caused by a deterioration of fundamentals and has largely been contained within a few sectors.”

4
The economy is likely to continue to improve later this year. Not only are we seeing improvement in economic data, but also optimism among consumers and small businesses is improving. The preliminary April consumer sentiment index from the University of Michigan beat expectations and came in higher than the March reading. Separately, the March NFIB small business optimism index came in at 93.4, beating estimates and the previous month’s reading.

However, it’s important to note that US business sentiment, as measured by the ISM manufacturing index, peaked at the end of last year. Historically, this economic indicator has been a strong signal that markets may move sideways for one or two quarters. Investors should be patient since we may not see improvement until later this year.
5
Time horizon should weigh heavily on how investors respond to the selloff. If an investor has short-term liquidity needs, then this selloff is not a buying opportunity. We could see the market go lower before it bounces back. For example, stocks could be driven lower by geopolitical issues such as the growing crisis in Ukraine.

We’re also concerned that rifts may develop between FOMC members in the coming months, which could cause market jitters. For investors with longer time horizons, we believe the recent market skid poses a good buying opportunity. If fundamentals continue to improve, then stock prices can be supported and move higher. That’s simply the nature of market cycles.


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Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.


A Word About Risk
: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
 
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

 

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