What a week! Just when it was looking gloomy… markets bounced up significantly.
What does it mean? Are we done with the bad news yet? Unfortunately, the answer is not an easy one to answer. On the one hand, The American Association of Individual Investor survey showed dramatic improvement in investor sentiment. This is up to 37.5%, which is much closer to the average of 39%. Investor Sentiment also improved.
Sounds great right? Well, when we dig deeper, we can see that there was more money coming out of equity funds than entering… to the tune of $5 Billion.
Where is the positive coming from in the market? It appears as though it may be short sellers covering positions. Again, this is not easy to call.
Jim Paulsen, chief market strategist at Wells Capital Management summarized it best in his statement,” a quick recovery back to near all-time highs would leave the stock market with many of the same vulnerabilities that started the correction. Consequently, we would not be surprised if the stock market tests its correction low yet again and perhaps even fails before reaching a final bottom.”
Additionally, the Federal Reserve released the last meeting minutes. Markets were initially happy to hear the Fed is concerned about global growth, most likely because it means rising rates aren’t highly likely at this juncture.
However deep inside the minutes, there is a hint at further cuts to economic estimates. The U.S. central bank’s staff indicated potential growth of only 1.74% over 2015-2020 (which was accidently released this past summer). That is down from the average growth of 3.1% over the past 50 years. The minutes don’t specify the amount they are thinking might be lower in 2016 but it explains why most of the Fed members voted to wait on raising rates.
Recession watch is still on and news will probably continue to be thrown about “proving” we are or are not in the recession in the ever present desire to be “correct.” The biggest take away is probably that we need to be cautious but not dooms day folks.
Caution and not panic should be our biggest bet. We continue to advocate not making emotional decisions regarding investments and positioning. Sentiment can be wrong, markets can be stubborn, there is always something around the corner that is unforeseen. We will be getting a better picture of whether or not we are slowing down domestically in the next week as earnings season kicks off in earnest.
If corporations consistently disappoint, it could mean more pain. If they surprise to the upside, we could see more improvement and perhaps to the point at which we would anticipate a more sustained rally that we would want to participate in. Based on numbers released so far, recession likeliness doesn’t seem urgent and is low, but present.
Written by: Benjamin Bimson CIMA®, Financial Advisor
1 The ‘Icahnbottom’? Where his call for doom stands. http://www.cnbc.com/2015/10/09/the-icahn-bottom-where-his-call-for-doom-stands.html
2 Buried in the Fed minutes is another downgrade to the U.S. economy. http://www.marketwatch.com/story/buried-in-the-fed-minutes-is-another-downgradeto-
3 Board of Governors of the Federal Rerserve System, Press Release 7-24-15. http://www.federalreserve.gov/newsevents/press/monetary/20150724a.htm
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