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 It's been more than three years since the S&P 500 <.SPX> has dropped
10 percent or more. This month, the benchmark index fell five
sessions in a row, from Jan. 8 through Jan. 15, shedding more than 3
percent in the process. Since December 29, the index has fallen
almost 5 percent through Thursday's close.
What to make of the declines is less clear. The selloff has left
shares more reasonably priced: The forward looking price/earnings
ratio of the S&P 500 stood at 16 on Friday, down from 20 at the end
of 2014.
U.S. investors have been spooked by a collapse in commodities and
may not be sure whether that’s a signal to buy or sell. Oil prices
have fallen in half in recent months, trading below $50 a barrel
<CLc1> at around six-year lows. That's cut gasoline prices for
Americans and helped U.S. consumer sentiment hit an 11-year high in
January, data showed on Friday.
At the same time, lower crude prices indicate global demand is
slowing, potentially depriving U.S. companies of markets they need
to boost profits.
Prices for copper, regarded as an indicator for global economic
activity because of its uses in construction and telecommunications,
fell 8 percent this week to five-and-a-half year lows.
Adding to uncertainty was Thursday's move by the Swiss National Bank
to scrap a three-year-old currency cap, an about-face that sent the
Swiss franc soaring against the euro. Shares of Swiss exporters
tumbled as a result.
The dollar also rose to an 11-year high against the euro on Friday.
The greenback has gained steadily against a basket of major
currencies <.DXY> for months, rising about 16 percent as of the end
of June.
Those gains are a double-edged sword. U.S. exporters will now find
their goods more expensive, and therefore harder to sell, abroad. A
strengthened currency, though, helps fight inflation, which could
encourage the U.S. Federal Reserve to keep its accommodative stance
awhile longer to help boost economic growth.
In the week through Jan. 14, both retail and institutional investors
pulled money out of stock funds and instead put cash to work in bond
funds, according to data from Lipper, a Thomson Reuters unit.
U.S.-based stock funds saw $4.1 billion in outflows over that week.
In contrast, bond funds added $4.3 billion in net new cash.
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Earnings reports may not offer much reassurance. Of the 40 S&P 500
companies that have reported through Friday morning, 55 percent have
beat analyst revenue expectations and 77.5 percent have beat
earnings expectations - but forecasts had been revised down sharply
in recent weeks, according to Thomson Reuters data.
Key earnings reports due next week include Dow Jones components
Morgan Stanley <MS.N>, IBM <IBM.N>, American Express <AXP.N> and
Johnson & Johnson <JNJ.N>. Wall Street still expects overall
earnings of S&P 500 companies to rise 3.5 percent for the fourth
quarter, but that's off from the 11 percent consensus that prevailed
on Oct. 1.
For some investors, the recent dip is a buying opportunity after
stocks hit a series of record highs in the last year.
"We're in buying mode now, and are absolutely pleased to be able to
pick up some stocks we're excited about while investors are putting
them on sale," said Lamar Villere, a portfolio manager at Villere &
Co, which has about $3 billion in assets under management. He's been
buying real estate developer Howard Hughes Corp <HHC>, LKQ <LKQ>, a
provider of auto replacement parts and DST Systems <DST>, a software
development company.
Next week other shoppers may bring their lists to market, shrugging
off the events that sent stocks lower this week.
"I believe it's more likely to be noise than part of a broader
correction," said Ed Keon, a portfolio manager at Quantitative
Management Associates, a Prudential Financial company, where he
helps manage more than $60 billion.
(Reporting by Luciana Lopez; additional reporting by Linda Stern and
Caroline Valetkevitch. Editing by Linda Stern and John Pickering.)
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