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Aug 24, 2015 10:28 AM

Why stocks are tumbling 6 years into the bull market

The Associated Press

NEW YORK (AP) — Well, that was fun while it lasted.

For years, investors in U.S. stocks shrugged off threats — a government shutdown, fear of a euro collapse, a near U.S. debt default — and just kept on buying. At the sixth anniversary of the bull market in March, the Standard and Poor's 500 index had more than tripled in value.

Now, buyers are hard to find. A wave of selling has hammered major indexes, with the S&P 500 losing nearly 6 percent last week. That was its worst weekly slump since 2011. U.S. stock futures Monday are indicating another steep decline that could pull the index into what Wall Street calls a "correction," or a fall of 10 percent from a recent high.

Corrections are natural in a bull market, a pause in the market's march higher, and this one is long overdue. They usually come about once every 18 months. The last one was four years ago.

The big trigger for selling last week was yet more evidence of a slowdown in China's economy, but there were plenty of other worrisome developments weighing on the market. A look at a few of them, and why you may not want to panic, yet.


Despite Beijing's efforts to restore calm, the Chinese stock market has taken investors on a wild ride this summer. Then last week, the government announced a depreciation of the country's currency, stoking fear that the economic slowdown there was even worse than it had let on.

On Friday, more bad news: A gauge of manufacturing showed that key sector on the mainland is continuing to contract.

What happens in China matters, and not just because it is the world's second-biggest economy. Falling Chinese demand has sent prices plunging for all manner of commodities — iron, copper, oil. That has walloped countries that export them.

Its surprise devaluation also triggered other governments to drive their currencies lower, roiling financial markets and spreading fears of a currency war.


The steep drop in the price of oil in the last month has become a major concern for traders. Oil briefly went below $40 a barrel on Friday, its lowest price since the financial crisis six years ago, and fell firmly below that benchmark Monday.

If oil keeps falling, it is likely to drag down the S&P 500. Drillers and other energy companies make up a significant chunk of that index. Shares of those companies have plunged 35 percent in the past 12 months.


The upside to falling oil is that all the money that drivers are saving at the gas pump should mean more spending by them at stores — and a faster-growing U.S. economy. But Americans are choosing to pay off debt instead of going shopping.

"Household finances are growing more healthy ... but you want to see a pickup in spending, too," said Tim Courtney, chief investment officer of Exencial Wealth Advisors.

The new frugality helps explain why the biggest long-term driver of stock prices — corporate earnings — have been so disappointing lately. In the second quarter, companies in the S&P 500 grew earnings per share just 0.07 percent from a year ago, according to research firm S&P Capital IQ. That is the worst showing in nearly six years.

The next report card on earnings doesn't arrive until October. In the meantime, investors will be looking at other indicators of economic and corporate health. This coming Friday, the government reports on consumer spending in July.


Many investors pick and choose stocks based on a company's business outlook, but there is an entirely different class of trader that relies on technical indicators to make investment decisions. Many of their screens were flashing "sell" this week.

The S&P 500 and the Dow have broken through a few key technical levels recently. One important one is their 200-day moving averages, which the two indexes pierced on Thursday, helping to fuel selling. Both indexes dropped 2.1 percent that day, before further tumbling on Friday.

The good news is the last time the S&P 500 broke through its 200-day moving average, in early July, it bounced back from those levels after a few days.


The Federal Reserve has been signaling that, with the economy improving, it could start raising rates to keep inflation in check, perhaps as soon as next month. For years, investors have been fretting that the market could drop sharply when the central bank starts raising rates. The rates, held near zero for the entire bull market, have been widely credited with pushing stock prices up.

This week investors did an about-face and started worrying about the opposite. In its minutes from the central bank's July meeting, released Wednesday, Fed officials expressed concern that China's slowdown could pose risks to the U.S. economy. Investors wondered whether that meant the growth here is fragile, and started selling stocks.

Ernie Cecilia, chief investor officer of Bryn Mawr Trust, said the switch in views is ironic, and a little unsettling.

"The market was saying, 'Start lifting rates. Let's get this over with,'" he said. "Now the market is concerned that Fed is worried the economy is slowing."

On the bright side, the U.S. economy is looking healthier lately. Employers have been on a hiring spree, and that has helped push the unemployment rate to a low 5.3 percent.

Investors will get another clue on the economy on Thursday when the government releases its estimate of economic growth in the April-June period.


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