I have no idea if we will see a bear on this correction go-around or the next 10%-19% pullback or the one after that. What I do know is that the commodity slump has resulted in Conoco Phillips slashing 10% of its global workforce; high paying oil jobs continue to disappear in a world of $45 oil. I also know that the Federal Reserve wants to hike overnight rates, likely raising the borrowing costs for consumers and businesses just as the Atlanta Fed expects Q3 GDP at an anemic 1.2%. Perhaps most importantly, I recognize that the U.S. economy is part of a global economy that has been decelerating. JP Morgan’s Global Manufacturing PMI is now at 50.7 where a reading below 50 would be indicative of a global manufacturing recession.
In mid-August’s “15 Warning Signs,” I discussed the reasons why a pullback from the market top was exceptionally likely. One week later, in “Don’t Blame China,” I talked about the reasons why investors should expect a relief rally. And in my Thursday (8/27) commentary, “Are You Selling The Drama Or Buying The Rally,” I wrote:
If history teaches us that benchmarks tend to retrace half of their losses before retesting their lows – if you feel like you’ve been here before and you don’t choose to be scarred like that again – perhaps you might anticipate better buying opportunities in the weeks ahead.
You should not be surprised by today’s (Tuesday, September 1) extremely volatile move lower. The S&P 500 has moved back below the correction point of 1917 because the global economy is decelerating and investors are fearful that a rate hiking campaign by the Federal Reserve might be the straw that breaks the U.S. camel’s spine. And manufacturer-dependent sector funds like Materials Select Sector SPDR (XLB) are taking the heaviest hits.
Do I think that a Fed tightening cycle might cause an imminent U.S. recession? Not if chairwoman Yellen and other committee members decide upon a sloth-like pace of one-eighth of a point every third meeting or a “one-n-done” quarter point that would not be revisited for six months.
Then again, I am not sure that the recession/non-recession matters as much as others do. Right now, U.S. stocks require clarity on rate policy more than they require anything else. The longer it takes for the Fed to provide clarity, the more U.S. stocks are likely to struggle.
Gary Gordon is president of Pacific Park Financial, Inc.