|Market's 10% Correction Followed A 32% Surge; Advisors Must View All The Gloom In The Context Of What's Occurred In Recent Years|
|Monday, June 04, 2012 23:22|
There is a lot of nervousness and some people are even panicked, but the 10% retracement we’ve seen in the stock market since its last high followed a 32% gain from its last low.
Amid the market’s pullback last week, I spoke with a major client of an advisor and the simply refused to hear anything that sounded like it might be good news. He had this terrible foreboding feeling that something bad was going to happen. So I want to just address fear that’s out there today in this post and will be going into greater depth and presenting a lot more data on this issue at next Tuesday’s webinar.
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Yes, the S&P 500 has now declined 10% from its peak on April 2. But it really is not that big a move considering that the S&P 500 after hitting its low in October 2011 ran up 32%. The S&P 500 is actually this year still up 2%.
Also, it is almost uncanny how the same pattern has recurred for two years in a row and now seems to be happening all over again. In 2011, the market corrected 22% from its high in May to its October low. And, a year before, we had a similar summer retrenchment of 17%. So far, the pullback has been from peak to trough 10%, but it must be viewed at within the context of what’s occurred in this very nervous economy over the past few years.
Just a few comments with regard to the May jobs report. Yes, it was a disappointment, but one piece of data that I am intrigued by is that the so-called household job report released also last Friday showed 422,000 net new jobs were created in May.
Every month, the Department of Labor does two surveys. The high profile one is the “Establishment” job survey of companies, which is the one everyone has focused on and that was disappointing. But the Labor Department also every month does a telephone survey of households, and data was much more favorable than the establishment survey.
The household job survey is a reflection of small business activity and agricultural job creation. The household survey of jobs found normally tracks closely with the establishment survey, but in May there was an unusual divergence. While the establishment survey showed that just 69,000 net new jobs were created, the household survey showed that 422,000 new jobs were created. That is obviously much better. In addition, the ADP survey, which is also a reliable indicator of job activity in the economy, showed 133,000 new jobs were created in May. This divergence would lead you to believe things are perhaps not as bad.
Personally, I believe the gloom is overdone. Yes, there is some slowing in the economy but like Fed Governor Sandra Pianalto in today’s Wall Street Journal, I am not convinced the economy is taking a turn for the worse. The recent weakness might just be payback for stronger than expected numbers we saw earlier in the year due to unseasonably warm weather. We’re probably looking at more of a buying opportunity than a sell signal.
I’ll have a lot more today on all this at Friday’s webinar.
Editor's Note: This story was updated June 6 at 7:40 a.m. to correct an error. The earlier version of the story incorrectly stated that the 200-day moving average for the S&P 500 index had not been breached, when, in fact, it had been broken last Friday. We regret the error.