The bull and bear bronze statue outside the stock market in Frankfurt: Germans are feeling less then favourable toward the euro and the EU, but are more optimistic about their own country.Michael Probst/Associated Press
Given the number of observers who just know that a correction is coming, it would come as no surprise to contrarians if the S&P 500 yet again avoided falling 10 per cent or more.
The benchmark index surrendered an earlier gain on Wednesday afternoon, deepening the sell-off that began during the last week of July. The overall decline adds up to 3.4 per cent, taking the S&P 500 back to levels seen in late May.
Of course, things would have to get a lot worse to cross that 10 per cent threshold – the accepted definition of a correction – which has been no easy feat in recent years. Indeed, the S&P 500 has gone three years without correcting. That is an extraordinarily long time, and forms the backbone to many forecasts that see a correction looming.
So what does the sell-off look like so far? In a word, broad: All 10 subindexes in the S&P 500 are underwater, as of Tuesday's close.
Energy stocks and utilities are the worst hit, falling more than 5 per cent each. Industrials and financials are down about 4 per cent each. Consumer staples are down 3.5 per cent and tech stocks are down 3 per cent. Consumer discretionary stocks, materials and health-care stocks are down about 2.5 per cent each. And telecom stocks are down just over 1 per cent.
It isn't easy to see a pattern here. Defensive, dividend-heavy stocks are down. But so are economically sensitive stocks. Perhaps this makes sense: Bearish observers believe that just about every part of the market suffers from hefty valuations.
Gold – seen by some investors as a haven – has been of little help, rising all of $14 during the mayhem. As for U.S. Treasury bonds, the yield on the 10-year bond has fallen back below 2.5 per cent as prices have nudged higher, but the yield was actually a little lower in mid-July.
Global stocks are also down, though the turning points are considerably different than the start dates for the U.S. sell-off. Japan's market began to slide on July 30, or nearly a week after the last U.S. record high. Europe, as represented by the Euro Stoxx 50 index, has fallen 7.8 per cent since mid-June – although the declines have accelerated since the U.S. market began to wobble. Emerging market stocks began to fall on July 28, following the U.S. lead by several days.
There are several reasons to be concerned that the modest declines could get worse. For example, mergers and acquisitions activity tends to roll over with the stock market – and activity was hit hard on Tuesday when $100-billion worth of deals among Twenty-First Century Fox Inc., Time Warner Inc., Sprint Corp., T-Mobile US, evaporated.
As well, investors appear to be complacent. According to the American Association of Individual Investors' asset allocation survey, retail investors have jumped into the stock market, sending cash holdings down to levels not seen since the dot-com bubble days of 1999. You bet, this is a contrarian indicator, given investors' uncanny ability to keep cash levels high when stock prices are low, and low when stock prices are high.
Still, there are many ways to be contrarian – and when just about everyone can see a correction coming, the contrarian case is that the market will find a way to dash this consensus expectation.
David Berman