Friday, June 12, 2015

The market is talking about correction again

We have written several times that the US stock market had been in the upward trend for a bit too long. But the last time we wrote about this was about a year ago. Since then, there was no significant correction in the most US stocks. In fact, the US market’s broad index, S&P 500, has not seen a sizable correction (more than 10%) for almost four years now, since October 2011.

This time, it seems to be different, although we wouldn’t expect an imminent market correction even now. What is different this time is the economic background. Since March 2009, when the stock market was at its recent low, the economic indicators in the US were improving and expectations were high. That was before 2015. Stock markets are forward-looking and whatever the current economic situation, if investors believe in future economic growth, they will be buyers of stocks. But, in 2015, the US economy has so far not met expectations for growth.

This economic weakness has translated into an anemic performance by American stocks – the S&P 500 index is up just 1.7% so far this year, while at the same time last year it was up 4.4%. But will this market stagnation turn into a market correction? As some pundits feel that a 10% market correction is long overdue, its likelihood may increase with time. At the same time, US stocks are clearly in a long term bull trend and the severity of the 2007-2009 crash made them less sensitive to negative factors. 

Apart from the US economy, one of the things to watch these days is the state of emerging markets. Emerging market troubles often spill over to developed markets. According to numbers cited by the Financial Times newspaper and, emerging market funds suffered outflows of $9.3 billion this week, their biggest redemptions since 2008. Of that, $7.1 billion fled out of China. The Chinese economy keeps cooling down. China’s central bank has just revised down its forecasts for the country’s economic growth in 2015 to 7%. For comparison, the Chinese GDP grew on average by 9.1% annually from 1989 to 2014.

Ukrainian Credit Union Limited

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