David Fuller's view -
Investors expecting the American economy to jolt equities out of their 2016 funk saw those hopes dashed this week as fresh signs of sluggishness sparked a selloff in Technology and consumer shares with the highest valuations.
The Nasdaq 100 Index plunged 6 percent in the week, with declines on Friday sparked by a mixed labor report that sent 90 percent of the gauge’s members lower for the five days. Disappointing results from LinkedIn Corp. to Tableau SoftwareInc. fed fears that momentum shares are hitting a wall at the same time economic data showed growth slowing in the services and manufacturing industries.
The selloff in U.S. stocks pushed the S&P 500 down by 8 percent in 2016, as investors fled riskier assets amid renewed concern that China’s weakness and a rout in oil are slowing the world’s largest economy. Damage was heaviest in the Nasdaq Composite Index, where losses now stand at 13 percent this year after the gauge outperformed the Standard & Poor’s 500 Index in every year since 2011.
“We are seeing some softening in the economy and until that reverses or there is more central bank accommodation, I think the market is going to continue to be vulnerable,” Russ Koesterich, global chief investment strategist at BlackRock Inc., said by phone. “It’s going to be hard for the market to go back to the old highs in the near future.”
I think this is a cyclical or technical bear market – a stronger version of 2011 – rather than a far more serious secular bear such as 2008, in response to what we eventually learned was the worst credit crisis recession since the 1930s.
However, the current bear trend is worse than 2011 because valuations on Wall Street are higher; leverage is greater, and most importantly, sovereign wealth funds in commodity exporting countries from Norway to Saudi Arabia are forced sellers. Previously, when commodity prices were considerably higher, leading exporters of resources had positive cash flow and were channelling more money into their sovereign wealth funds.
These factors, and also the one sector which is performing, are discussed in greater detail in the most recent Audio.
This section continues in the Subscriber's Area. Back to top