There were several reasons given for the 87 selloffs but they all started with an overpriced stock market. A combination of a computer program driven trading flaw and a series of rapid interest rate increases initiated by Alan Greenspan seemed to bear the brunt of the blame. However, the market recovery was swift regaining 300 of the 508 point loss in two subsequent trading days following the decline. By year-end, the market closed at 1939; recovering the entire 508 point drop and finishing the year up 2%.
Today, we have a stock market that seems to move in only one direction and that is up, despite the usual amount of troubling news that we as a world economic leader must face from economic and geopolitical perspective sources. By most measures, our stock market is fully and slightly overpriced. There are only two ways that this can be rectified. One way would be a market decline to a point where values would be more in line with historic norms. The second would be a broad-based surge in company earnings to support the current valuations.
Factset Research, a leading provider of forward-looking growth and earnings estimates for the S&P 500 companies is quite helpful on this front. In an October 13th report, they offered the following third quarter information with 6% of the S&P companies reporting actual results:
78% of the group reported positive sales surprises while 81% reported positive EPS (earnings per share results). Earnings revisions typically follow the reporting dates and as of the 10/13 reporting date, there have been 5 positive and 5 negative guidances provided by S&P companies. Hurricane and currency adjustments were the principal causes for change. The bulk of the companies have yet to report but the season is off to a good start.
Market corrections, as I have said before, are just part of the investment experience. They do clean out some of the speculation and put the markets on firmer ground built on long-term investors. That being said, a larger allocation to bonds might help investors weather the experience.
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results