Over the last 2 years the market has pulled back 7% on three separate occasions. Each time it appeared the market was heading for correction territory (10% or more), just to shift direction and come roaring back. Evaluating each of these moves in the market may give us insight into our current pullback which has reached 7%.
November, 2012
Market conditions were weak in November of 2012 with nearly 7.9% unemployment, PMI indexes flirting with contraction domestically, and Core CPI at 2%[1]. More importantly at the time there was a fair amount of uncertainty about the future of Quantitative Easing, which is just now coming to a close. Forward guidance by the Federal Reserve Board (FRB) was a fairly new process and was undergoing adaptation by the markets.
August, 2013
In the summer of 2013 there was plenty of concern, but much of it was not coming from the stock market. Unemployment was 7.4%, manufacturing was well over 50 (denoting expansion), and Core CPI was subdued at 1.7%[2]. Rather, August of 2013 felt much like the August of 2011 as concerns were coming from our government; threats of a government shutdown and the looming debt ceiling. These issues combined for skittish investor sentiment.
The drama related to the debt ceiling came only 2 years after the US saw their credit rating reduced by Standard & Poor’s after failing to raise the debt ceiling. This situation caused a correction that lasted from mid-July to the end of September, 2011.
February, 2014
Much like the previous 7% swing, there was decent strength on the markets as unemployment was 6.6%, Core CPI remained subdued at 1.6%, however manufacturing had fallen 8 points [3]. While manufacturing had weakened Unemployment was steadily falling and soft CPI allowed for good consumer demand.
A major contributor to uncertainty at that point was rising tensions between Russia and Ukraine, which of course have done nothing but expand from that point. This issue along with ongoing tensions between Gaza and Israel, as well as Iraq, Syria and issues with ISIS have kept the markets at bay for much of 2014.
Today
In contrast to past 7% swings currently unemployment sits at 5.9%, manufacturing data fell 2.4 points to 56.6, still a very strong reading, and Core CPI sits at 1.7%[4]. The current 7% slide comes at a time where the FRB is closing out their taper program. We are at an inflection point, where the market could prove to break into correction territory or bounce back quickly as past swings have done.
International
German industrial production and factory orders fell sharply to -4.0% and -5.7% in September respectfully[5]. This data underpins the issues in the Eurozone at this point. Weak demand leading to weak manufacturing and the largest economy in the Eurozone is clearly not immune.
China HSBC Services PMI fell to 53.5, still expansionary, but this has been the strength of an otherwise troubled economy[6]. Manufacturing has struggled through-out 2014 and services have done well while China has been attempting to transition to a consumption based economy. This shift clearly causes concerns for China’s economy.
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[1] www.investing.com
[2] www.investing.com
[3] www.investing.com
[4] www.mfs.com
[5] www.mfs.com
[6] www.investing.com