Amid a dozen rationales for this week’s selloff in stocks, from Argentina to the Federal Reserve and Portugal’s banks, Michael Shaoul said something simpler should be considered: the number 2,000.
The Standard & Poor’s 500 Index slid 2.7 percent for its biggest retreat since June 2012 as $765 billion was erased from global equities. Investors started selling a week after the benchmark gauge for American equities reached an all-time high of 1,987.98 and ended seven straight days within 30 points of the 2,000 milestone, the longest streak to date.
“I doubt that this will prove to be more than a short-term affair but we’ve felt all along that getting through 2,000 in a straight shot was a big ask,” Shaoul, who oversees about $20 billion as chief executive officer at Marketfield Asset Management LLC in New York, said in an interview. “We always allowed for this sort of a pullback in our market overview and so don’t need to react too much to it.”
Signs of anxiety are multiplying in a U.S. market that has gone almost three years without a decline of 10 percent and that hadn’t even had a 1 percent drop in the Dow Jones Industrial Average for 52 days before this week. The Chicago Board Options Exchange Volatility Index, a gauge of investor concern derived from options prices, had two of its three biggest increases of the year in the last 12 trading days and jumped 34 percent over the week.
Global stocks ended their worst week since March as crises from Argentina to Portugal and weak earnings from Samsung Electronics Co. and Adidas AG combined to break a market calm that had given equities five straight months of gains. The MSCI All-Country World Index dropped 2.4 percent over the five days as Argentina defaulted on debt and Portuguese securities regulators suspended trading in Banco Espirito Santo.
The S&P 500 lost 2.7 percent to 1,925.15 while the Dow fell 467.20 points, or 2.8 percent, to 16,493.37. All 10 main industries in the S&P 500 retreated. Energy shares slumped the most, sinking 4.1 percent, as Exxon Mobil Corp. reported oil and natural gas production declined to the lowest level in almost five years.
Losses were biggest in Europe, where the Stoxx Europe 600 Index declined 2.9 percent while Spain’s Ibex 35 index slipped 3.4 percent and Germany’s DAX fell 4.5 percent.
Global asset markets, showing signs of a “liquidity shortage,” are “walking a tight line,” Pacific Investment Management Co.’s Bill Gross said during a radio interview on “Bloomberg Surveillance” with Tom Keene.
“There is a sense that in the past few days that all asset prices are going down,” Gross said. “I attribute it to Russia and the potential for a global mini trade war and the Argentinian default and that future investors will be leery of investing in emerging markets.”
Marketfield’s Shaoul said the S&P 500 may bounce should it fall as low as 1,900, a level it last saw in May. Brian Barish, who helps oversee about $11.5 billion as president of Cambiar Investments LLC, said a floor is possible just below that.
“The last resistance point on the way up usually becomes the resistance point on the way down,” Barish said by phone. “The market had a tough time getting through about the 1,890 level in the S&P 500 in late May so that would make for about 5 percent. That’s not very big in the general scheme of things, but we’ve been in a pretty quiescent environment.”
It took the S&P 500 almost 6,400 days to go from 100 to 200 between 1968 and 1985, according to Howard Silverblatt, an index analyst at the New York-based S&P Dow Jones Indices. The longest interval after that was the 13 years needed to go from 1,500 in 2000 to 1,600 in 2013. The gauge made the next two 100-point advances in an average of 101 days -- about half as many as it took to cross 1,900 on May 23.
A doubling of corporate earnings and unprecedented economic stimulus from the Fed have driven the S&P 500 to yearly gains of 24 percent since global equities bottomed in 2009. The gauge trades at about 17.5 times annual earnings, down from a four-year high of 18.3 in June, data compiled by Bloomberg show.
“We’re probably looking at a near-term correction here, and I can’t tell you whether it’s going to be 3 percent or 10 percent,” Gary Black, global co-chief investment officer for Calamos Investments in Naperville, Illinois, said by phone. The firm oversees $26 billion. “You need corrections periodically to build a stronger base. We believe we’re still in a secular bull market and we’re in the fifth inning.”
The S&P 500’s losses came right after Goldman Sachs Group Inc. predicted the sight of rising bond yields would spur a brief selloff in shares. Goldman also advised investors to hold fewer government bonds because yields will probably rise as U.S. inflation accelerates and the Fed stops its bond purchases in October.
In a strategy note dated July 25, the bank cut its rating on stocks to neutral for the next three months, predicting a reprise of last summer’s increase in Treasury rates would result in similar losses for equities. The MSCI World Index lost 8.8 percent from May 21 to June 24 in 2013, a period in which yields on 10-year Treasuries rose to about 2.54 percent from 1.93 percent, data compiled by Bloomberg show.
Yields on 10-year notes climbed as high as 2.61 on July 31 then fell back to around where they started at 2.49 percent after the Labor Department said employers added fewer jobs than economists forecast in July.
The S&P 500 slipped 0.5 percent on July 29 after President Barack Obama announced new sanctions against Russia and warned that actions in the Ukraine are “setting back decades of progress.” It was virtually unchanged a day later even after the government said gross domestic product expanded at a 4 percent annual rate in the second quarter.
“This week was one where I raise 1 to 2 percent cash to try to reassess potentially the pace of the economy and the pace of central bank policy,” John Augustine, chief investment officer for Huntington Trust in Columbus, Ohio, said by phone. The firm oversees more than $12 billion. “That’s prudent. We just don’t think the pace of economy and the Fed are a risk. We’ll probably see the money dribble back in. We don’t think this is the start of a 10 percent correction.”
This week’s selloff came amid a year when the most speculative parts of the U.S. market are showing signs of weakness. The Russell 2000 Index of smaller shares, whose 239 percent rally between March 2009 and the end of last year was 66 percentage points greater than the S&P 500’s, is down 4.2 percent in 2014, compared with a 4.2 percent advance in the index of larger companies.
An investor who bought the S&P 500 on Feb. 3 after the index lost 5.8 percent over 12 sessions would have a gain of 11 percent today. The 4 percent drop from April 2 to April 11 gave way to a rally of 6 percent, data compiled by Bloomberg show.
“The market was looking for a good reason to sell off, everybody was concerned we haven’t really had a pull-back of any magnitude,” said John Stoltzfus, New York-based chief market strategist at Oppenheimer & Co. “This year we’ve had several declines in the area of 2 percent or greater, not many, but they have tended to be good rally points for stocks.”