U.S. Stocks Decline Most in Eight Weeks as Apple Tumbles
Comment of the Day

September 25 2014

Commentary by David Fuller

U.S. Stocks Decline Most in Eight Weeks as Apple Tumbles

Here is the opening of Bloomberg’s report on Wall Street’s weakness today:

U.S. stocks tumbled the most in eight weeks, as Apple Inc. sank on snafus related to its new smart phone and signs of worsening conflict in Russia and the Middle East.

Apple plunged 3.4 percent to send technology stocks in the Standard & Poor’s 500 Indexto the biggest decline since April. Biogen Idec Inc. and TripAdvisor Inc. lost at least 3.1 percent as investors sold some of the bull market’s biggest winners. Allegheny Technologies Inc. sank 4.8 percent as industrial metals slid. The Russell 2000 Index of small-cap stocks sank 1.4 percent, poised to close at a four-month low.

The S&P 500 fell 1.4 percent to 1,970.45 at 3:17 p.m. in New York, with all but 21 of the index’s components declining. The Dow Jones Industrial Average plunged 235.49 points, or 1.4 percent, to 16,974.57. The Nasdaq 100 Index slid 1.9 percent. All three gauges are having their worst performance since July 31. Trading in S&P 500 stocks was in line with the 30-day average.

“We could have a pull back of 5 percent anytime if you have a confluence of factors that impact investor psychology or geopolitical factors that seem to get out of control,” Marshall Front, chief investment officer at Chicago-based Front Barnett Associates LLC, said by phone. “Stocks are no longer undervalued. There are rumors the Russian parliament authorized confiscation of foreign investments, Apple is weighing on the tech sector, and the durable goods top line number was very weak.”

David Fuller's view

Wednesday’s rally which briefly checked a 3-day slide for US indices now has a last hurrah look about it.  It was also a sucker punch which triggered some stops for short sellers who have had a tough time during Wall Street’s largely bulletproof rally since the October low nearly three years ago.  Meanwhile, latecomers to the bull market were piling in.

So what happens next? There are plenty of concerns, as Fuller Treacy Money has been pointing out.  They range from the comparatively new geopolitical risks of concern, from Russia in Ukraine and the associated reciprocal sanction policies, to the Middle East war against Isil terrorists, which we are told will be long.  Inevitably, this involves uncertainties of battle and the risk of reprisal attacks on the countries now supporting Iraq’s new government. 

Even without these costly ventures, we knew that the US stock market, on average, was far from cheap, including on a relative basis with equities in other countries.  We know that QE, which ends next month, certainly pushed stocks higher as it was intended to do.  Corporate earnings have also been flattered by share buybacks.  There is the unresolved background of high government debt, which will become more expensive if or when interest rates rise.  Leverage used by investors has increased against the background of rising share prices and historically low interest rates.  New issues are rising and Wall Street has an Alibaba hangover.  Market breadth is deteriorating.  Might iconic Apple have stumbled with bendy new, larger phones?  The stronger dollar is a potential headwind for corporate earnings.  Seasonally, the quarter is ending and both September and October can be tricky months for Wall Street. 

In other words, there are plenty of reasons why the long overdue 10% correction could easily occur.  Nevertheless, the background is far from alarming.  Monetary policy remains accommodative, despite the imminent ending of QE.  Government bond yields remain low and inflation is not a problem, at least in terms of government statistics.  In fact, lower commodity prices, not least for crude oil, are favourable for the US economy and global GDP growth in general.  The US economy is the clear leader in technological innovation.

In conclusion, while we should not be surprised to see a correction, that would provide another buying opportunity.  Meanwhile, I would be cautious about leverage and high-flying fashionable momentum shares at this time.  High-yielding shares with covered dividends remain a comparatively safe haven.  Keep an eye on the Russell 2000 which remains the canary in the coalmine in terms of deteriorating market breadth.  A Wall Street correction usually triggers even larger reactions in many other stock markets.  My guess is that China would be less affected, not least because it has lagged on the upside but is beginning to recover and has some of the most attractive valuations.    

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