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How to make sense of the stock market's wild ride How to make sense of the stock market's wild ride
(5 months later)
“Keep “Keep calm and carry on.”
calm and carry on.” Brad McMillan, chief investment officer at Commonwealth Financial, keeps a copy of the famous motivational World War II-era British sign above his desk but insists he didn’t need to refer to it once during what felt to many observers like a stock market meltdown throughout the day Thursday.
Brad McMillan, however, was far from hitting the panic button.
McMillan, chief investment officer at Commonwealth Financial, keeps a copy of the “I’ve seen things bounce up and bounce down before like this, and I had already established at what points I’d start to get worried about stocks,” he says. Last week’s blurp doesn’t even set his yellow "caution" light flashing. (For the record: that would only start when the S&P closes below 1,828, and he’d only really worry if it fell beneath 1,760.)
famous motivational World War II-era British sign above his desk but insists he That doesn’t mean that the rest of us don’t feel as if we’ve embarked – under duress – on the latest rollercoaster. The Bull Market Momentum Terror Ride is exhilarating whenever we set new highs, but what we fail to recognize is that the steeper the climb, the bigger the inevitable plunge. And while we’re in the midst of one of those dives, it’s all that we can do to contain our fear. We can’t think ahead rationally, to understand that virtually all of those precipitous declines are followed by more upward climbs of some kind.
didn’t need to refer to it once during what felt to many observers like a stock That said, Thursday’s 2.1% drop in the S&P 500 wasn’t just the largest one-day decline in the bellwether stock market index that we’ve witnessed since February. It is taking place at a particularly tricky point in time.
market meltdown throughout Momentum felt great when it was working in our favor. It has been only little more than a week since the S&P 500 last set a new high. And the index has kept on hitting records throughout the dreary winter and spring, in spite of the fact that the weather has put a damper on economic activity, hurting everything from homebuilding to retail sales.
the day Thursday. But those gains have catapulted us into uncharted territory and left us squabbling over the point at which the stock market goes from being nicely valued to just plain overvalued. (Unhelpfully, there are as many answers to that question as there are pundits eager for their five minutes of fame on CNBC.)
McMillan, What is certain is that we’re paying a far higher price for every dollar of corporate earnings than we were a year ago.
however, was far from hitting the panic button. That’s particularly true since we’re right smack dab at the start of earnings season. In early January, when the first quarter kicked off, analysts gleefully predicted that S&P 500 companies would report earnings growth of 6.6%. Today, they’re expecting something closer to 1%.
“I’ve Earnings season will drag on until mid-May, meaning that there is plenty of potential for other disappointing results to damage confidence in the stock market.
seen things bounce up and bounce down before like this, and I had already And yet … By far the worst of last week’s selling pressure – the real market meltdown – was confined to a handful of corners of the Nasdaq Stock Market. While the S&P 500 was down 2% on Thursday, the Nasdaq had plunged 5.6%, posting its worst drop in more than three years.
established at what points I’d start to get worried about stocks,” he says. Last week’s blurp doesn’t even set his yellow "caution" light flashing. (For “There are pockets here that had seen silly inflation in stock prices,” says Commonwealth’s McMillan. “Now they’re sending out signals that they’re starting to behave rationally.”
the record: that would only start when the S&P closes below 1,828, and he’d On the margins, this had already happened. King Digital’s “Candy Crush Saga” game may have turned Facebook users into addicts, but the company couldn’t demonstrate to the satisfaction of potential IPO investors that it was more than a one-hit wonder. When desperate bankers finally managed to complete the deal last month, the fledgling stock promptly did a face-plant.
only really worry if it fell beneath 1,760.) Veterans of bubble-prone sectors like biotechnology already were wary. Even as mutual fund manager Tom O’Halloran was picking up awards and kudos early this year (his Lord Abbett Micro Cap Fund earned 74% for investors in 2013, thanks to big gains from tiny biotech companies), he was already selling some of those holdings.
That “There’s a lot of irrational exuberance in this space, and a lot of excessive outperformance,” he told me on April Fool's Day.
doesn’t mean that the rest of us don’t feel as if we’ve embarked – under duress – on the latest rollercoaster. The Bull Market Momentum Terror A case in point? Intercept Pharmaceuticals, a speculative company with 45 employees and no products on the market in which O’Halloran had taken a small stake. When the company announced a clinical trial had been halted early because results were so promising, the stock nearly quadrupled – in a single day.
Ride is exhilarating whenever we set new highs, but what we fail to recognize is That’s great news, but O’Halloran figured the market reaction was over the top. “We were paid in two days what we thought – absolute best case – we thought we would earn in two years,” he says.
that the steeper the climb, the bigger the inevitable plunge. And while we’re Stocks like that in the biotech arena, one of the worst hit by Thursday’s selloff, are the reason O’Halloran was already scouring the stable and cyclical growth markets in search of alternatives.
in the midst of one of those dives, it’s all that we can do to contain our Waves of big selloffs like those we’ve witnessed in recent days tend to happen when people have been counting on their speculative market bets to pay off in big profits – only to be disappointed.
fear. We can’t think ahead rationally, to understand that virtually all of Unless you’re a speculator, too, little of the market drama should cause you much anxiety. Hopefully, your portfolio isn’t overloaded with high-flying stocks that are now bearing the brunt of the selloff, so unless you panic and sell, for now, at least, your losses are only on paper.
those precipitous declines are followed by more upward climbs of some kind. Should you sell? Well, there aren’t any signs that what we’re seeing now is fueled by anything more than typical valuation jitters and the kind of jolt you get when the market comes down to earth. (It’s kind of the same feeling that you get when you’ve been running and slip on a patch of ice and end up hitting the ground with a thump.) And the very fact that the market can take fright so readily is, perversely, reassuring: it shows that someone, at least, is paying attention.
That
said, Thursday’s 2.1% drop in the S&P 500 wasn’t just the largest one-day
decline in the bellwether stock market index that we’ve witnessed since
February. It is taking place at a particularly tricky point in time.
Momentum
felt great when it was working in our favor. It
has been only little more than a week since the S&P 500 last set a new
high. And the index has kept on hitting records throughout the dreary winter
and spring, in spite of the fact that the weather has put a damper on economic
activity, hurting everything from homebuilding to retail sales.
But
those gains have catapulted us into uncharted territory and left us squabbling
over the point at which the stock market goes from being nicely valued to just plain overvalued. (Unhelpfully, there are as many answers to that question as there
are pundits eager for their five minutes of fame on CNBC.)
What is certain is
that we’re paying a far
higher price for every dollar of corporate earnings than we were a year ago.
That’s
particularly true since we’re right smack dab at the start of earnings season.
In early January, when the first quarter kicked off, analysts gleefully predicted
that S&P 500 companies would report earnings growth of 6.6%. Today, they’re
expecting something closer to 1%.
Earnings
season will drag on until mid-May, meaning that there is plenty of potential for
other disappointing results to damage confidence in the stock market.
And
yet … By far the worst of last week’s selling pressure – the real market
meltdown – was confined to a handful of corners of the Nasdaq Stock Market.
While the S&P 500 was down 2% on Thursday, the Nasdaq had plunged 5.6%,
posting its worst
drop in more than three years.
“There
are pockets here that had seen silly inflation in stock prices,” says
Commonwealth’s McMillan. “Now they’re sending out signals that they’re starting
to behave rationally.”
On
the margins, this had already happened. King Digital’s “Candy Crush Saga” game
may have turned Facebook users into addicts, but the company couldn’t
demonstrate to the satisfaction of potential IPO investors that it was more
than a one-hit wonder. When desperate bankers finally
managed to complete the deal last month, the fledgling stock promptly did a
face-plant.
Veterans
of bubble-prone sectors like biotechnology already were wary. Even as mutual
fund manager Tom O’Halloran was picking up awards and kudos early this year
(his Lord Abbett Micro Cap Fund earned 74% for investors in 2013, thanks to big
gains from tiny biotech companies), he was already selling some of those
holdings.
“There’s a lot of irrational exuberance in this space, and a lot of
excessive outperformance,” he told me on April Fool's Day.
A
case in point? Intercept Pharmaceuticals, a speculative company with 45 employees and no products on the market in which O’Halloran had taken a small
stake. When the company announced a clinical trial had been halted early
because results were so promising, the
stock nearly quadrupled – in a single day.
That’s great news, but O’Halloran
figured the market reaction was over the top. “We were paid in two days what we
thought – absolute best case – we thought we would earn in two years,” he says.
Stocks like that in the biotech arena, one of the worst hit by Thursday’s
selloff, are the reason O’Halloran was already scouring the stable and
cyclical growth markets in search of alternatives.
Waves
of big selloffs like those we’ve witnessed in recent days
tend to happen when people have been counting on their speculative market bets to pay off in big profits – only to be disappointed.
Unless
you’re a speculator, too, little of the market drama
should cause you much anxiety. Hopefully, your portfolio isn’t overloaded with
high-flying stocks that are now bearing the brunt of the selloff, so unless
you panic and sell, for now, at least, your losses are only on paper.
Should
you sell? Well, there aren’t any signs that what we’re seeing now is fueled by
anything more than typical valuation jitters and the kind of jolt you get when the market comes down to earth. (It’s kind of the same feeling that you get when
you’ve been running and slip on a patch of ice and end up hitting the ground with
a thump.) And the very fact that the market can take fright so readily is, perversely,
reassuring: it shows that someone, at least, is paying attention.