PMC Market Commentary: April 11, 2014
A Macro View – Trouble
Trouble, trouble, toil and trouble. So it wasn’t quite as dire as Macbeth but it was indeed a troubling week for equities. Thursday’s rout of the Nasdaq index, and the concomitant slide in biotech and technology names, was especially severe, with the overall market posting one of its worst days since late 2011. Not only did the Nasdaq lose more than 3% in one day, but many momentum stocks ranging from biotech to tech lost 10% of more for the week and are off significantly more from their March peak (some in excess of 40%).
And yet, aside from select names that have been as volatile on the downside as they were heady on the upside, it is difficult to say as of yet that we are headed for a major correction or that something other than short-term trading sentiment has fundamentally shifted. Investors (those inclined to buy and hold what they have bought for more than seconds or hours) have not been buying or selling aggressively, and much of the market has been dominated by trading-oriented hedge funds or high-frequency funds (which have been the subject of heated and important debate). That says something about trading and sentiment but not much about fundamentals.
In the next three weeks, we will have a slew of corporate earnings, which will begin to set the tone of the market. That is likely to trump these recent gyrations. In addition, overall, U.S. equities remain flat for the year, and few markets in the world have seen much year-to-date movement. Unless you had a portfolio highly concentrated in higher beta names, we are still in a consolidation period.
That could, of course, change on a dime, to the upside or down, in the near-term. The airwaves are filled with people making grand statements about the beginning of a major correction or the cusp of a next bull run. Rather than join that chorus, it’s probably wiser to assess earnings and juxtapose that with what we do know: the Federal Reserve may be tapering but money and interest rates remain loose (“accommodative”); there is decent and sustainable global growth, and companies are seeing modest revenue growth.
Finally, and crucially, bond markets and short-term money markets are not showing any deep signs of strain, panic or instability. The financials crises of 2008-2009 and briefly again over Greece and the Euro in 2011 were marked by sharp fissures in bond markets. That is not the case as of now. Of course, it’s something to attend to, but in that absence, the weekly volatility in equities should be kept in perspective. Shakespearian drama is always useful to invoke, but for now, the reality of financial markets remains far less dramatic.
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