The Market Makes an Astounding Recovery After Its Recent Selloff

What’s going on here? Since the last edition of this column two weeks ago, the market underwent a decline of historic proportions in a short period of time. As fast as it went lower, it rebounded just as quickly, and as of Tuesday, the Dow and S&P were once again knocking on the doors of their all-time highs!

And if one wanted to read them and weep, here is a list of what befell the market as of Friday, April 11. The three major indexes — Dow, S&P and Nasdaq — all declined to their lowest levels in two months; the Nasdaq underwent its worst two-day decline since November 2011; the Nasdaq and Russell 2000 Index of small stocks, market leaders last year, fell by 9.7 percent from their March highs, thus virtually achieving what is known as a “correction,” which is a decline of 10 percent; all three major indexes suffered their worst week since June 2012; the Nasdaq declined for three straight weeks, the first such occurrence since November 2012; the S&P underwent its worst two-day decline since last June, 2013; the NBI Biotechnology component of the Nasdaq collapsed by 21 percent from its late-February high and fell for seven straight weeks in the process, and many of the former technology high-fliers such as AMZN, FB, NFLX, LNKD, PCLN and TSLA, among others, also collapsed to the tune of more than 20 percent from their all-time highs reached earlier this year. And these aforementioned groups were the market leaders of 2013 and early 2014, with outsize gains and by declining by 20 percent or more, they all officially entered the standard of a bear market.

So after these downside disasters, instead of continuing to decline, the market last week turned right around as if nothing negative had ever taken place. For instance, after its worst week since June 2012 (as just mentioned), the S&P decided to put in its best weekly showing since last July and the Dow also joined the upside party with its strongest performance of the year as well, its best since last December.

Let us go over some of the “explanations” put forward by various market experts as to what caused this sudden decline and then discuss the reasons for the remarkable turnaround as well. Participants pointed to a number of reasons, the first one being that these high-fliers had gotten way ahead of themselves as these social-media darlings’ accelerated ascent into the stratosphere reminded observers of the internet bubble of the late 1990s that burst so miserably in 2001–2002. In other words, here was a group of stocks that had gotten way ahead of themselves in terms of traditional market metrics, such as price/earnings and price-to-sales ratios. In other words, they were priced for accelerated earnings and revenue growth that may or may not materialize.

Then we had that other bugaboo that market observers can always point to when the going gets rough, namely geo-political concerns, and this time the market had an easy target with the Russian annexation of Crimea out of the Ukraine and the military incursions into various parts of eastern Ukraine by poorly disguised Russian army units. What exactly are the concerns over these activities is a bit nebulous as it is the Russian economy that is the one that would suffer the most damage if further Western sanctions are applied against it, and I have outlined the damage done so far to the Russian economy in prior issues of this column.

What caused the market to turn around so quickly after a decline of this nature could be attributed to various reports that showed that our economy is starting to turn the corner after the miserable winter weather that affected so many parts of the country during the first two months of the year. The awful weather had resulted in consumers staying away from stores, airlines cancelling thousands of flights and hotels and restaurants losing large amounts of business.

Perhaps the most important of these recent reports was that the last two weekly jobless claims numbers were the lowest in seven years, which means that the labor market could finally be improving. In addition, the final April U. of Michigan Consumer Sentiment Survey showed its highest reading since last July. March retail sales rose by the most since September, March Industrial Production made further gains after February’s number was the highest in four years, both the April Philadelphia and Richmond Fed regional manufacturing surveys showed stronger than expected gains and the March Index of Leading Economic Indicators registered its highest reading in four months.

Further support for stocks came from Fed Chair Janet Yellen, who had muffed her initial comments as head of the central bank by suggesting that the current record-low interest rates that have been in effect for more than five years could be raised sooner than most market participants had expected. Last week she made amends for having misspoken when she said that the Fed has a “continuing commitment” to support the recovery, which obviously means that they are in no hurry to increase rates.

Finally, the market has also been helped by the start of the first-quarter earnings reporting period. At the worst levels of gloom two weeks ago, profit projections had come all the way down to a decline of 0.9 percent, slashed from an original projection of a more than six percent gain at the start of the year. With the first 100 S&P companies having already reported, that figure has now been raised to show a gain of 0.7 percent, which means that the lowering of the bar has made it easier for companies to beat the estimates. This also proves the old adage that an investor wants the market to decline ahead of a major event, in this case the first-quarter earnings reports, because the reduced expectations make them easier to “beat,” so to speak.  In next week’s column I will list those major companies whose reports have been better than expected and whose subsequent price gains have been instrumental in this astounding market comeback.

And to make the picture a little rosier as well, around 70 percent of the companies that had already reported have beaten their profit forecasts, which is higher than the 62 percent who traditionally are able to surpass this benchmark.

This article appeared in print on page 19 of the April 24th, 2014 edition of Hamodia.