Why 20% Stock Declines May Be the New Normal

On Monday the S&P 500 Index (SPX) dropped below its 200-day day moving average for the first time in nearly two years, and this loss of stock market momentum may herald the onset of more troubled times for equities, Financial Times columnist Michael Mackenzie writes. He also cites fundamental causes for concern, including the withdrawal of central bank stimulus, trade conflict, and the possible peaking of global economic growth. Opining that "the equity market correction has scope to extend further," he continues, "The return of volatility means drops of 10% and even 20% could become normal for equities again."

On April 4, the S&P 500 was up by 1.2% for the day and closed 2.0% above its 200-day moving average, according to Barchart.com. Nonetheless, Monday's plunge below this key technical indicator was clearly a bearish signal, CNBC reports. The year-to-date low for the S&P 500 is 2,532.69, reached in intraday trading on February 9, and 4.2% below the April 4 close. Meanwhile, veteran investment strategist Jim Paulsen of The Leuthold Group sees dangers and stresses in a variety of asset classes, not just stocks. (For more, see also: Pre-Crash Indicator Near Peak Amid Trade Tensions.)

'Nothing Beats Tech Gloom'

"Nothing beats the gloom that has enveloped the tech universe, or at least its brightest stars," Mackenzie observes. He cites recent troubles at Facebook Inc. (FB), President Trump's swipes at Amazon.com Inc. (AMZN), and rising doubts about the long-term viability of advanced electric car maker Tesla Inc. (TSLA) as elements of "an abrupt reversal for the tech sector," recently the market leader and the darling of many investors. "Regulatory backlash" is a major concern, he indicates, citing comments from Matt Maley, equity strategist at Miller Tabak and frequent CNBC guest, who says "It's an election year and there is a feeling that regulatory action in some form is coming."

TINA Turnover

TINA stands for "There Is No Alternative" to buying stocks, despite high valuations, given historically low, near-zero, yields on bonds and bank accounts. However, with the Federal Reserve and other central banks around the globe signaling the end of their quantitative easing programs, the TINA era appears to be ending, Mackenzie observes. Indeed, with an average dividend yield of just 2%, the S&P 500 is becoming increasingly less attractive to income-oriented investors as the rates on money market instruments such as U.S. Treasury Bills rise, he adds.

'Another Correction Overdue'

Moreover, the combination of rising interest rates, historically lofty stock market valuations, and trade tensions are setting the stage for another 10% market correction, according to another report by CNBC. Toss in political unease in Europe as another catalyst, and David Marsh, managing director and co-founder of think tank OMFIF tells CNBC, "I actually do see a correction of another 10% happening (and) I think it will be overdue and probably salutary."

The S&P 500 already endured a 10.2% correction from its record high close on January 26 through February 8. Since then, after a series of recoveries and setbacks, the closing value of the index has remained within 10% of the January 26 high. However, on Monday, Tuesday and Wednesday of this week, the index has dropped below 90% of its January 26 high during intraday trading.

Earnings to the Rescue?

A number of observers believe that a strong first quarter earnings reporting season will, in the least, stabilize stock prices, and possibly send them back on an upward trajectory. "My expectation is that when earnings season kicks off in the next several weeks that could provide some support for the market since I expect earnings to be strong," as Michael Arone, chief investment strategist at State Street Global Advisors, told CNBC.

Jim Paulsen is a strategist who's unconvinced. He sees "gangbuster expectations" about earnings that are easy to disappoint, and hard to exceed, thus tilting risk heavily towards the downside for stocks. (For more, see also: Why Super Earnings Won't Save The Stock Market.)

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