Tuesday, September 1, 2015

Surveying the Wreckage of August

A pretty brutal August is now in the books, and although things didn’t turn out quite as bad as they looked at this time last week, the markets still ended up suffering. The Dow Jones Industrial Average finished the month down 6.6 percent, ending August with its steepest monthly loss since May 2010.

The other major indexes had it about as bad. The S&P 500 index was off by 6.3 percent, and the Nasdaq Composite was down by 6.9 percent. For both those indexes, it was their largest monthly decline since May 2012.

And it’s possible the carnage is not over. According to S&P Capital IQ, there have been 11 other times that the S&P 500 fell by more than 5 percent in August since 1945. The index went on to decline in September as well 80 percent of those times.

Monday, August 31, 2015

What Does This Volatility Mean?

That was some ride in the stock markets last week, wasn't it? Here's how wild it was: The Dow Jones industrial average went six straight days with moves of at least 200 points. That had never happened before.The S&P 500 had six straight days with 1 percentage moves, which hadn't happened since 2009.

Is there anything we can learn from this? According to the market research firm Convergex, these volatile stretches tend to occur at two distinct points: at the beginning of a bull market, or toward the end of one. For example, there were 82 moves in the S&P of more than 1 percent in 1982, when that bull market was just beginning. That declined to 28 by 1985, then picked back up to 61 in 1986 and 95 in 1987 as the bull ended its run.

We saw similar moves at the beginning of this bull market: There were 118 plus or minus 1 percent moves in 2009, but just 38 in 2014. We're at 40 already in 2015.

Friday, August 28, 2015

The Big Bonus

There's an interesting effect in American compensation trends, uncovered by a new study out from Aon Hewitt, an international human capital and management consulting company. Companies are spending more than ever on compensation - but with a twist. While the pay raises are impressive, bonuses are growing at a much faster rate.

Aon Hewitt predicts that base pay for salaried exempt employees will increase by 2.9 percent in 2015. That means base salaries will roughly be keeping pace with the growth of the U.S. economy. But variable pay increases - which includes bonuses and other incentives - will increase 12.9 percent.

Companies have long budgeted more money to  bonuses than across-the-board pay raises, but the trend has sharpened greatly in recent years. A similar survey in 1996 showed a much closer relationship -  salaries rose by 3.9 percent while bonuses rose by 7.5 percent.

Thursday, August 27, 2015

GDP Moves Up

After a tumultuous week in the stock markets, there was some surprisingly good news out this morning from the Commerce Department. Following its initial estimate of second quarter GDP growth at 2.3 percent, Commerce has now revised that upward to a robust 3.7 percent.

What changed in the new revisions? Businesses increased investment by 3.2 percent increase of a drop of 0.6 percent, with spending on structures such as office buildings rising by 3.1 percent instead of the initial estimate of a drop of 1.6 percent. Consumer spending, the main driver of U.S. economic activity, was revised up slightly to 3.1 percent instead of 2.9 percent.

There were also upward revisions to state and local government spending and inventories. Also fueling the rise: Corporate profits rose an estimated 2.4 percent in the second quarter, after declining by 5.8 percent in the first quarter.

Wednesday, August 26, 2015

A History of Corrections

It's been a rough couple of days on the stock market, but as any experienced investor will tell you, you have to expect these kinds of things. A correction - a 10 percent drop in value - is a regular occurrence in the markets.

Stock researcher Ed Yardeni has compiled a decade-by-decade record of how often these drops happen. This is the second correction since 2010, which is about par for the course. And barring a total meltdown like we had in 2008-09, the numbers usually don't get much worse than what we've already seen. Here's Yardeni's full chart:

Tuesday, August 25, 2015

The S&P Corrects Itself

Yesterday we noted that the S&P 500 hadn't tumbled into correction territory - meaning it wasn't yet down 10 percent or more from its recent peak. But that situation ended on Monday, when the index lost 3.9 percent, to close 11 percent below its May 21 record close of 2,131. That ended the S&P 500’s fifth-longest correction-free streak ever.

What does that mean for the future? If history is any guide, that means there is a good chance that a 20 percent selloff is coming, which would put it into bear market territory. Following the last correction-free streak, which ended after a record of about 84 months in October 1997, the S&P 500’s decline peaked at 10.8 percent, which would seem to bode well for this sell-off.

However, the other three streaks that were longer than the current one ended with eventual declines of 22 percent, 34 percent and 57 percent. The average overall decline of the those declines was 31 percent. Let's hope history does not repeat itself.

Monday, August 24, 2015

What Happened on Friday?

Friday was a disaster day on Wall Street, especially for the Dow Jones industrial average. The Dow lost 3.1 percent on Friday alone, sending it down to 10.1 percent off the high it set back in May. That puts the index officially into correction territory.

In addition to the Dow, the S&P 500 and and the Nasdaq indexes also had their worst single-day percentage declines since 2011 on Friday, although the other two indexes aren't in correction territory - yet. Indexes in France, the Netherlands, Spain and Belgium are also now officially in correction, down more than 10 percent from recent highs.

The carnage could also been seen at the level of individual stocks. Among the S&P 500 companies, 492 of them lost value on Friday. Some 328 have dropped 10 percent to be in correction, and 147 have fallen 20 percent from recent highs, putting them in bear-market territory.