Next week may show whether US stocks are finally undergoing a long-awaited correction or if a recent run of losses are just a bump on the road to more gains.
It has been more than three years since the S&P 500 .SPX has dropped 10 percent or more. This month, the benchmark index fell five sessions in a row, from January 8 through January 15, shedding more than 3 percent in the process. Since December 29, the index has fallen almost 5 percent through Thursday’s close.
What to make of the declines is less clear. The selloff has left shares more reasonably priced: The forward looking price/earnings ratio of the S&P 500 stood at 16 on Friday, down from 20 at the end of 2014.
US investors have been spooked by a collapse in commodities and may not be sure whether that’s a signal to buy or sell. Oil prices have fallen in half in recent months, trading below USD 50 a barrel CLc1 at around six-year lows. That’s cut gasoline prices for Americans and helped US consumer sentiment hit an 11-year high in January, data showed on Friday.
At the same time, lower crude prices indicate global demand is slowing, potentially depriving US companies of markets they need to boost profits.
Prices for copper, regarded as an indicator for global economic activity because of its uses in construction and telecommunications, fell 8 percent this week to five-and-a-half year lows.
Adding to uncertainty was Thursday’s move by the Swiss National Bank to scrap a three-year-old currency cap, an about-face that sent the Swiss franc soaring against the euro. Shares of Swiss exporters tumbled as a result.
The dollar also rose to an 11-year high against the euro on Friday. The greenback has gained steadily against a basket of major currencies .DXY for months, rising about 16 percent as of the end of June.
Those gains are a double-edged sword. US exporters will now find their goods more expensive, and therefore harder to sell, abroad. A strengthened currency, though, helps fight inflation, which could encourage the US Federal Reserve to keep its accommodative stance awhile longer to help boost economic growth.
In the week through January 14, both retail and institutional investors pulled money out of stock funds and instead put cash to work in bond funds, according to data from Lipper, a Thomson Reuters unit.
US-based stock funds saw USD 4.1 billion in outflows over that week. In contrast, bond funds added USD 4.3 billion in net new cash.
Earnings reports may not offer much reassurance. Of the 40 S&P 500 companies that have reported through Friday morning, 55 percent have beat analyst revenue expectations and 77.5 percent have beat earnings expectations – but forecasts had been revised down sharply in recent weeks, according to Thomson Reuters data.
Key earnings reports due next week include Dow Jones components Morgan Stanley (MS.N), IBM (IBM.N), American Express (AXP.N) and Johnson & Johnson (JNJ.N). Wall Street still expects overall earnings of S&P 500 companies to rise 3.5 percent for the fourth quarter, but that’s off from the 11 percent consensus that prevailed on October 1.
For some investors, the recent dip is a buying opportunity after stocks hit a series of record highs in the last year.
“We’re in buying mode now, and are absolutely pleased to be able to pick up some stocks we’re excited about while investors are putting them on sale,” said Lamar Villere, a portfolio manager at Villere & Co, which has about USD 3 billion in assets under management. He’s been buying real estate developer Howard Hughes Corp (HHC), LKQ LKQ, a provider of auto replacement parts and DST Systems (DST), a software development company.
Next week other shoppers may bring their lists to market, shrugging off the events that sent stocks lower this week.
“I believe it’s more likely to be noise than part of a broader correction,” said Ed Keon, a portfolio manager at Quantitative Management Associates, a Prudential Financial company, where he helps manage more than USD 60 billion.