Last week's market sell-off has investment strategists and financial advisers hunkering down in anticipation of continued market volatility, but they aren't ready to say that it marks the beginning of a double-dip recession.
Last week's market sell-off has investment strategists and financial advisers hunkering down in anticipation of continued market volatility, but they aren't ready to say that it marks the beginning of a double-dip recession.
On Thursday, the Dow Jones Industrial Average fell 376 points, or 3.6%, ending at 10,068 — its steepest one-day drop since Feb. 17, 2009. The S&P 500 was down almost 12% from its 2010 high of 1,217.28 on April 23 — meaning that the stock market has had an official correction, which is defined as a pullback of 10% or more from the most recent high.
On Friday, the Dow Jones Industrial Average recovered, gaining 125.38 points, or 1.25%, to 10,193.39. For the week, the index fell 426.77 points, or 4.02%.
The S&P 500, meanwhile, climbed 16.1 points, or 1.5%, to 1,087.69 on Friday. For the week, the index fell 47.99 points, or 4.23%.
The market drop is a cause for concern, but whether it means that the country is slipping back into a recession will largely depend on how investors react to market events in coming weeks, investment strategists said.
“I think there is a risk of a double-dip recession, but we aren't seeing it yet,” said Brett Hammond, chief investment strategist at TIAA-CREF. “There was certainly a dip in the Dow, but the Dow is not necessarily predicting a double-dip recession.”
Specifically, Mr. Hammond thinks that consumer spending over the next few months will play a major factor in whether the economy spirals downward.
Many think that last week's market correction was long overdue.
“This correction is normal, routine and expected for an 18-month-old bull market,” said Paul Schatz, president of Heritage Capital LLC. The firm manages $64 million and oversees another $100 million on a non-discretionary basis.
“Bull markets rarely correct 10% [or more] in their first year,” he said. “In year two, you normally see the first correction.”
Mr. Schatz said that he has been taking advantage of the pullback to do some buying.
He also thinks that the market's performance last week was the continued digestion of the flash crash of May 6.
“Post-crash behavior is always the same,” he said after the close last Thursday. “You rally and then get a decline that normally retests the low of the crash day, which is exactly what we're doing now.”
Much of the selling is due to fear over the uncertainty about the debt crisis in Greece as well as financial services reform in the United States, said Duncan Richardson, chief equity investment officer at Eaton Vance Corp.
That, on top of the flash crash, has really unnerved investors and caused the market drop, he said.
“The fundamentals are pretty strong, but the fear factor is very high and spiked this week,” Mr. Richardson said.
As the U.S. financial reform package gets worked out in Congress, it will take out some of the uncertainty that is hurting the markets, he said.
David Kelly, chief market strategist for J.P. Morgan Asset Management, agrees that fear is driving the markets.
“The market volatility starts to drive the story and be the story,” he said.
That being said, the reaction to the markets can cause just as big problems as problems with the markets themselves, Mr. Kelly said.
“It's an overreaction to the fundamentals, but I can't say it's an overreaction to the overreaction,” he said.
J.P. Morgan is advising long-term investors to take advantage of stock prices' being pushed lower, but to be aware that this volatility isn't going away soon.
“You need to ask deep questions about how much volatility you can take,” Mr. Kelly said.
Even advisers who are confident that the country is not barreling toward a double-dip recession are headed for the sidelines.
“I don't think we've got a double-dip recession because we've starting to pull out of the [economic] nose dive we were in,” said Will Hepburn, founder of Hepburn Capital Management LLC, which has $30 million under management.
Still, the sovereign-debt worries in Europe have him concerned.
“It's not just banks and mortgage companies this time,” Mr. Hepburn said. “I've gotten very conservative,” moving to 75% cash over the past three weeks as volatility increased.
Mr. Hepburn said that the market was oversold as of Thursday and he expects a rebound. But he said that he doesn't plan to get clients back in until he sees upside volume, with a pause on the way up that indicates that short covering is finished and sustained buying has begun.
Senior editor Dan Jamieson contributed to this story.
