Last week was volatile and saw broad-based declines, with the weakest performance still associated with smaller companies. The main cause was weaker economic data from Europe and commodity price declines, although other factors such as the international health crisis caused by Ebola and select earnings warnings factored into the mix. The correction in the S&P now registers about 5.5% from the highs of September.
Putting last week in perspective, we have had three other fast-paced (two or three week) declines this year of similar size — each about 4.5% to 5% in the S&P500. They occurred in late January, early April and late July. This, along with technical factors and the trading in other asset classes puts the market in a place that requires vigilance and potential caution. Near-term stability in the S&P500 would make this look like the prior pull-backs and more “business as usual.”
Alternatively, further decline in the S&P500 could feed on itself and take the market down further. Roughly 1905 on the S&P 500 represents the low of the August decline and is approximately the 200-day moving average. Breach of this level might bring out more sellers and could result in something closer to the 10% correction the market has gone so long without.
The odds of a 10% correction here are greater than they have been in some time, although certainly it may not occur. The primary difference here relative to other pull-backs this year is more notable weakness in other parts of the market. Small caps, mid-caps and foreign equities have been displaying much more weakness than the S&P with most of those indices now in the red for the year.
On a positive note, economic data in the U.S. has held up well and we have not been observing issues with riskier areas like IPOs (still coming to market) and venture capital.
Lowe Wealth Advisors will continue to monitor the landscape and keep you informed of our views. Presently, we are not in a rush to allocate any excess cash balances. Should we see stabilization or further declines in the markets, we may use either scenario as a possible opportunity to rebalance any actively managed portfolios.
Source: All economic and market data FactSet
Bradley Williams, Lowe Wealth Advisors Chief Investment Officer
Gregory Lowe, CFP® Vice President
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This commentary is intended for the dissemination of general information regarding market conditions to Lowe Wealth Advisors clients. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this report will come to pass. While any general market information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. Any opinions expressed are current only as of the time made and are subject to change without notice.
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