Sasha Cekerevac: Well, that didn’t take long! Just a few weeks ago, I wrote an article stating that investors should begin to worry about the lofty level of the stock market. Since that time, the S&P 500 has dropped by more than five percent in less than two weeks.
This market correction won’t be a surprise to my readers, as I have been suggesting investment strategies that can help prepare your portfolio for a large downswing in the market for some time now.
When I wrote the article in late January, the S&P 500 was surging, even though the preliminary Thomson Reuters/University of Michigan index of consumer sentiment dropped month-over-month. Since then, we have seen additional data coming from China showing that its economy is beginning to slow.
The Markit/HSBC China Manufacturing Purchasing Managers’ Index (PMI) for January was 49.6, much weaker than expected. (A PMI data point below 50 denotes a contraction in activity.) While many analysts have been expecting China to begin accelerating, this recent data is a dose of reality, as manufacturing jobs in China dropped for the third consecutive month. (Source: “HSBC China Manufacturing PMI,” Markit Economics, January 30, 2014.)
I know what you’re thinking; “Why should investors in the S&P 500 care about what happens in China?” A market correction doesn’t occur based on a single event. When you’re trying to develop investment strategies, especially if you are considering the potential for a market correction in a large index, such as the S&P 500, you have to take many factors into account, as if you’re working on a jigsaw puzzle.
First ask yourself, what are the positive and negative drivers in 2014 for the S&P 500?
Companies, in general, are extremely profitable, this is true, but revenues are not accelerating. Profitability is actually decelerating for the S&P 500 companies.
This does not mean a market correction will necessarily occur; however, when you consider how high the current valuation is for the S&P 500, we will really need to see an acceleration in economic growth both here and abroad if companies are to increase revenues, which will lead to a stronger bottom-line.
China and many emerging markets are extremely important for S&P 500 companies. For these stocks, a large part of profits actually comes from outside of America. If countries like China are beginning to falter, who is left to pick up the slack?