“Stock Market Gurus” Warn Of More Volatility Ahead
To this point in 2015, the stock market has been very good to investors and its performance has led many investors to take even more chances with their money. As we all know, all good things must come to an end, and some recent activity has some analysts predicting that the end is near.
Futures contracts have always been a good gauge for how most investors feel about what is to come in the market. So as the market day was coming to a close on Tuesday and S&P 500 futures were down by as much as 1.3%, analysts began to take notice. The S&P 500 is commonly used to represent market health because it is comprised of 500 of the largest U.S. companies, which makes a move of 1% in a short period of time a pretty big deal.
According to Bloomberg, “Selling increased after the contract slid below its average price over the past 100 days, with volume more than twice the five-day average for this time of the day.”
This means that once the S&P 500 futures contracts fell below a certain price, the trading volume shot up in a matter of seconds as investors scrambled to sell off their positions. Obviously, these investors believe that once prices hit this lower threshold that a larger drop is all but certain.
According to Yahoo Finance, “The move happened as China’s official manufacturing PMI report was released. The headline index unexpectedly climbed to 50.1 in March from 49.9 in February. Anything above 50 signals expansion.”
Sounds great, right? The reason this news was taken negatively by investors is that once the Federal Reserve starts to feel that the U.S. and global economies are beginning to stabilize, they will start to raise interest rates. Any increase in borrowing rates, even done gradually, could have a not-so-positive impact on the stock market.
A great example of good news being bad news is from back in February when the U.S. unemployment report showed an amazing 295,000 new jobs had been added. Because of investor fears that the Fed would use this as a reason to raise interest rates, stocks tumbled -1.42% on March 6th when the report was released.
Historically, wild swings in the market like this due to investor uncertainty have generally preceded big market corrections. The last two big market corrections took place in 2001 and 2008. UBS’ Julian Emanuel has begun to compare the end of 2014 and the beginning of 2015 to the years preceding those drops.
“The manic market movement – sharp plunges and even sharper surges – is not unlike the movement seen prior to major market tops in 2007 and 2000,” Emmanuel told Yahoo Finance. And we all know what happened after that.
Not all analysts are advising investors to start preparing for the worst, but nearly all of them have begun to advise further diversification to ride out the almost certain volatility to come.