What is going on with the stock market?
NEW YORK (AP) — It’s a skeptics’ market now. Just three weeks after stocks reached all-time highs, the market has turned volatile and investors have gone from cheerful to suspicious.
They’re worried about reports of slowing growth in the world’s largest economies, disappointed by earnings that never seem good enough and concerned about the stock market’s frequent triple-digit swings.
It isn’t a surprise to most money managers, who expected this year would be rougher after last year’s almost 30-percent surge. No stock market can go straight up. But the fact that the volatility started so early caught some investors by surprise.
Even with major indexes down 5 percent or more, there is room for optimism. There’s no sign the economy will backtrack into a stock-killing recession and any big stock-market drop is unlikely to last long.
Here is a look at the stock market’s vital signs.
EARNINGS LESS ROSY:
So far this earnings season, 44 companies have cut their earnings forecasts for the year while 10 have raised their outlooks, according to data from FactSet, a higher ratio than the historic norm.
It’s not a good sign. Stock prices are derived from the earnings that a company generates, or will generate in the future.
Investors bid up stock prices in the last three months of the year in hopes that the improving economy would translate into higher company earnings. Corporate America has delivered on earnings for the most part. But if companies continue to cut forecasts, it means stocks are too expensive and investors will have to reevaluate.
At the start of 2014, many investors believed the U.S. economic recovery was accelerating and that Europe was stabilizing. Recent data both here and abroad has cast doubt on that optimistic outlook.
It started with the December jobs report on Jan. 10. The U.S. government said the economy created only 74,000 jobs in December, far below even the most pessimistic of expectations. Other reports have also dampened economic spirits. A private survey of U.S. manufacturers showed factory activity unexpected slowed in January — due in part to the cold weather affecting most of the country.
Other reports show overseas economies cooling. Chinese manufacturing, a driver of global economic activity, slowed to a six-month low in January. In Europe, inflation was near zero, a sign that the eurozone’s recovery remains sluggish.
CORRECTION TIME?: The vast majority of investors believe that this year the stock market will experience a correction, the technical term for when a stock market index falls 10 percent or more,. A research report by Goldman Sachs in 2013 gave a 62 percent chance that a correction would happen in 2014.
Investors say a correction is likely due to the massive gains the stock market had in 2013, as well as the long stretch since the last correction, which happened 30 months ago, in August 2011. Historically, stock market corrections happen every 18 months or so.
“People have been waiting for a while for the piece of news, event, or data point that is going to cause the correction,” says David Kelly, chief investment strategist with J.P. Morgan Funds. “A lot of people are looking for an excuse to sell.”
WHAT FEAR?: Even though the Dow is down 7 percent this year, volatility and other “fear” gauges remain tame. The VIX, an often-quote gauge of how much volatility investors should expect in the market, has remained low for the past two-and-a-half years. The index is at 19.51. That is less than half what it was during the August 2011 debt-ceiling crisis and the last stock market correction. Even the Russell 2000 index, which is made up mostly of risky small-to-midsized companies, is not down significantly more than the rest of the market. The Russell has fallen 6 percent this year versus the 5.2 percent drop in the S&P 500.
Gold, another place investors typical turn to in times of fear, has seen only modest interest from investors. It’s up 5 percent — versus its 30 percent decline it had last year.
NO RECESSION EXPECTED: The U.S. economy grew at an annual rate of 3.2 percent in the final three months of 2013, and there are no signs that it could slip back into recession. The Federal Reserve has started cutting back on its economic stimulus program, citing the recent strength in the U.S. economy.
“U.S. economic growth is not slowing down; it’s just not accelerating as much as it was previously,” says Krishna Memani , chief investment officer at Oppenheimer Funds.
As long as there is no risk of a recession and company earnings continue to expand __ fourth-quarter earnings are up 7.9 percent from a year earlier — any fall in the stock market would be minimal.
THE BULL STILL KICKS: The bull market that started in March 2009 is about to hit its five-year anniversary. And it was unstoppable in 2013, soaring nearly 30 percent and setting new all-time highs repeatedly.
If the correction happens, it’s unlikely to last long. The market typically recovers in a few months. When the stock market had a correction in 2011, the S&P 500 index fell 17.8 percent from its July 2011 peak to its October 2011 low. However, the market recovered all of those losses by January 2012.