NEW YORK – 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. But even with major indexes down 5 percent or more, there is room for optimism. 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.
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 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.
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.
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.
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.
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. And gold, another place investors typical turn to in times of fear, has seen only modest interest from investors.
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.
As long as there is no risk of a recession and company earnings continue to expand, 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. If a correction happens, it’s unlikely to last long. The market typically recovers in a few months.