MAKING SENSE OF THE MARKET´S BIG SELLOFF / BARRON´S MAGAZINE

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Making Sense of the Market’s Big Selloff

There are plenty of reasons for Thursday’s broad-based stock decline. Here’s a round-up of opinions.

By John Kimelman           
  

Last week, the U.S. stock market took a big one-day hit because of a surprise devaluation of the Chinese yuan. But today’s big drop in stocks appears like it’s coming from many directions, including the U.S.

The Dow Jones industrial average closed down 358 points, or 2.06% taking it to a close of below 17,000 for the first time since last October. The index has fallen 4.5% for 2015. The more tech-focused and riskier Nasdaq fell 2.8% on the day.

A piece by CNNMoney does a decent job summing up the many reasons for the market’s big drop. While some articles simply point to the uncertain tone about the U.S. economy in the minutes of the July Federal Reserve’s rate-setting committee meeting, there’s clearly more going on.

For example, the piece points out that oil fell to a new, six-and-a-half year low Thursday morning before rallying up in the afternoon. “Not only is there an excess of oil globally, but China’s slowdown is driving a collapse in commodity prices. It has hurt many countries whose economies are based on oil, metals and agriculture,” writes CNNMoney. “The commodity bust is bad news for the economic outlook for several countries and the American companies that do business there.”

A piece by Yahoo Finance columnist Michael Santoli discusses the overall investor climate that has contributed to today’s big selloff.

A long-time student of stock-market behavior, Santoli writes that “the August Wall Street vacation evacuation is well underway, markets are facing an absence of inflation, huge air pockets underneath commodities and emerging-market currencies — and a vexing lack of clarity about what the Fed might do in less than a month’s time. The collective response to this environment devoid of strong conviction has been to pull cash out of riskier markets and wait.”

Santoli cities data from Barclays Capital stating that more than $90 billion has sought the shelter of money-market funds in the past six weeks. “That’s roughly the same magnitude of flight response seen in other risk-off spasms of the past four years, from the 2011 Euro debt crisis, the fiscal cliff drama of 2012 and the taper tantrum in 2013,” he adds.

Investors can only hope that this event is like the others that Santoli cites: that it won’t lead to further declines that take stocks into correction territory.

But at times like this, the C word is bound to be brought up.

In a short piece on the CNBC.com site, David Greenberg, president of Schaeffer Greenberg Advisors, wonders whether today’s drop is just the start of something worse rather than a dip worth buying.

Underlying his concerns are what he views as a fragile U.S. economy and an uncertain political outlook.

He writes that the economy is “built on artificially low interest rates and earnings growth derived from firing employees and cutting costs — not from producing and selling more products. The political outlook makes it worse: There is no one (from either side) standing out as someone who understands real fiscal policy.”

He adds, “I am not concerned about this short-term selloff, but I am deeply concerned that the market is setting itself up for a major and long overdue correction.”