Real Time Web Analytics

Stock market correction could be a healthy move

(St. Louis Post Dispatch) 

“Historically, it hasn’t been a problem when rates have been rising,” says Ken Crawford, senior portfolio manager at Argent Capital Management. “It’s when the Fed stops raising rates that the music stops.”

February 11, 2018 (David Nicklaus)

After allowing investors a long, pleasant nap, the stock market reminded us last week what turbulence is like.

A six-day decline of 9 percent, including 1,000-point drops in the Dow Jones industrial average both Monday and Thursday, served as a wake-up call after two years of steadily rising stock prices. Investors should take heart, however, from the reasons being given for the sell-off.

At the simplest level, stocks had become overvalued. The Standard & Poor’s 500 jumped 5 percent after the 2016 election, delivered a 21.8 percent return last year and climbed 6 percent more in January.

The runup was largely based on optimism about corporate tax cuts, but it was a case of too far, too fast.

“It’s probably healthy if we get some of this exuberance out of the market,” said Joe Williams, director of investment strategy at Commerce Trust Co. “Everybody had been scratching their heads … asking how the market could be so relentless on the way up.”

Monday’s plunge was exacerbated by a collapse in certain exchange-traded notes that allowed investors to bet on a further decline in volatility. These speculative investments lost most of their value and are probably headed for the scrap heap. They can’t do any further damage.

Many market commentators also blame the downdraft on renewed fears of inflation and rising interest rates. That’s not unusual nearly nine years into an economic recovery, even as the Federal Reserve says inflation remains too low, not too high.

What we’re not hearing is much talk of a recession. Analysts predict that the S&P 500 companies’ earnings will grow 18.5 percent this year.

“We have a fairly good economic backdrop,” Williams said. “We think stronger earnings will support the market from here.”

Even in a strong economy, a dramatic rise in interest rates could pose a threat. Higher rates increase companies’ borrowing costs and make bonds more compelling as an alternative to stocks.

Joe Terril, president of Terril & Co. in Sunset Hills, has been saying for months that stocks were due for a fall. “They are not going down because the economy is bad,” he said, “but it is going to be a complete re-evaluation of what stocks are worth.”

Terril thinks rising inflation will force the Fed to raise rates faster than most people expect. The Fed itself projects three quarter-point rate increases this year, and futures markets are predicting between two and three.

Past rate-increase cycles haven’t usually been bad for stocks. The Fed only raises rates when it thinks the economy is on solid footing.

“Historically, it hasn’t been a problem when rates have been rising,” says Ken Crawford, senior portfolio manager at Argent Capital Management. “It’s when the Fed stops raising rates that the music stops.”

The S&P 500 fell 10 percent between Jan. 26 and Thursday. Corrections of that magnitude happen about once a year, on average, so investment professionals are counseling clients to take this one in stride.

“It’s very natural for people to be concerned and scared when markets are falling,” says Peter Lazaroff, co-chief investment officer at Plancorp in Town and Country, “but losses are a normal and necessary part of investing.”

Last year, he notes, stock prices moved an average of just 0.3 percent a day, the second-lowest amount since 1929.

If you were lulled to sleep by such placid conditions, it’s time to wake up and pay attention. This looks like a healthy correction so far, but that doesn’t make it easy to live through.