Wall Street rolled out the red carpet on Wednesday, with the major averages down big in the midweek trading session. This red carpet, a reference to the red seen on traders’ screens, actually has been the more dominant condition during the past two weeks, and that’s a big change from the action since November.
In fact, I suspect that we are seeing the genesis of a much-needed, and much-anticipated, correction in broad-based domestic equities. This correction, once settled, could offer a nice buying opportunity for those who have waited patiently to put money to work.
Take a look at the chart here of the Vanguard Total World Stock ETF (VT). This fund recently broke below its 50-day moving average, and appears to be heading south. Although VT remains well above its long-term, 200-day moving average, that has not been the case for many big market segments.
For example, emerging markets, as represented by the Vanguard Emerging Markets VIPERs (VWO), have fallen sharply since mid-May. This broad measure of the emerging market segment now trades below both the 50- and 200-day moving averages.
Now, there are plenty of reasons why domestic, international and emerging markets have come under pressure of late. The main reason, however, is the Federal Reserve and the rumblings about a “tapering” of the current bond buying program better known as quantitative easing (QE).
The chatter from various Fed sources, including Fed Chairman Ben Bernanke, the recent Federal Open Market Committee (FOMC) minutes and Kansas City Fed President Esther George, all combined to give the market Fed fear withdrawals. In fact, George recently said that she supports slowing the pace of purchases as an “appropriate next step for monetary policy.”
The Fed fears, combined with downbeat metrics such as slower economic growth in China, a still-anemic employment picture in the United States and only modest gross domestic product (GDP) growth, it all adds up to a market that is poised for a correction of 5-10% or more.
The good news, however, is that we are likely to be left with an attractive buying opportunity in stocks once the dust settles, depending on how deep this pullback actually goes.
Right now, I’d say the safest bet is to protect your gains, if you have them, by trimming your winning positions and putting some cash aside. That cash will allow you to take advantage of the next leg higher in stocks once the pendulum swings back — and it always swings back.
A Few Thoughts on a New Housing Bull
The housing market is coming back, and in many markets of the country we are seeing an influx of buyers. That influx has helped drive prices substantially higher, particularly in areas that saw a sharp downturn in home prices in the years following the 2008-2009 meltdown.
One area that’s relatively close to me is the Inland Empire of Southern California. Homes in this area are up about 20-25% on average, which, of course, is good for existing home owners.
Interestingly, there’s a twist to this story that makes it not so good for new home buyers, or the economy at large.
You see, the primary reason why homes are going up is due to an influx of real estate investor dollars, and not demand from regular home buyers. A recent TV news spot on my local NBC affiliate told the story of one first-time home buyer who was outbid many times due to the large number of cash buyers that came in and actually paid more for the home than its listing price. Moreover, the all-cash, 10-day escrows were too enticing for sellers to pass up.
I bring this up because here we have a case of real estate investors moving in and bidding the price of homes higher. If this is the case across the country, then it means that there will be a rebound in home prices, which is good for current owners. Unfortunately, that rebound won’t have as significant a wealth effect, or an economic effect, as it did last decade when the growth of housing was more organic, more widespread and a sign that the economy was growing.
Of course, the housing market still is recovering from the Great Recession damage, so any improvement is welcome. Let’s just hope that improvement trickles down to regular homebuyers, and not just to real estate investors.
“24 hours in a day. 24 beers in a case. Coincidence? I think not.”
— H.L. Mencken
He was one of the greatest journalists, essayists and writers ever, but H.L. Mencken also knew he had to enjoy life with the assistance of the finest libations. He further knew how to deliver a humorous line, which he does brilliantly in the quote here. I think it’s important to remember that life can get very serious sometimes, and that’s why it’s important to unplug and enjoy when you can.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.
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