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Stocks Continue Selloff As Fear Seemingly Trumps Reality - Week Ended 7/2/10
posted 07.06.2010 at 09:53 a.m. by steve
Stocks sank for a third consecutive week, and in sharp fashion. The S&P 500 plummeted -5.03% and is now off -8.30% in 2010 while the Dow has suffered a similar fate. The second quarter was the first negative performance quarter for investors in five and as we have noted before, it has entered official correction territory which is defined as a decline in value of more than -10% (bear markets are defined as a drop of -20% or more). With the Dow having again fallen below the psychologically significant level of 10,000, the economic soft patch seems to be intensifying as the negative tone of the stock market since April now appears to be weighing upon business and consumer behavior. This notion is supported by the notably weaker than anticipated economic data released over the last six weeks. The weakness has been especially concentrated in the housing sector and employment, and is spreading to the consumer through what appears to be deterioration in sentiment and retail sales.
Given the recent attack on investor confidence, we acknowledge that the bearish case for the economy seems increasingly legitimate; it feels very contrarian to be an optimist at this juncture. Investment markets seem to have become once again, detached from the fundamentals of the economy and corporate profits. By almost an metric, valuations on stocks look historically cheap, while bonds (treasuries in particular) are expensive. Fear and emotion once again seem to be the rule of the day. This holiday-shortened week, there appears little in the way of news that can change the bearish tone more positive, but with stocks deeply oversold, we may see an improvement in the markets. Be on the lookout for more commentary in Nvest Nsights, our quarterly newsletter due out later this week.