This CNBC article reviews several valuation models. There are arguments that the market is overvalued and undervalued.
It has been a tug of war between the bulls and the bears so far in September. The SPY is down 1.45% for the month although it was actually up as of this morning. But a good start ended in terrible fashion as the market fell 2.27% from open to high. Aside from China, the market is waiting on the Fed’s decision next week in regards to an interest rate hike.
Personally, I think a small 1/4 point hike is needed and would be a long term positive. We need to get the economy operating based on normal market forces, not artificially low rates. The job market appears strong enough to support such an increase, today’s JOLTS report shows more job openings and tight labor markets. The US economy is doing well. Savers have been starved by a zero rate policy. It is time for a slow (very slow) liftoff of rates.
But another obstacle that hasn’t been spoken about but is now on the near term horizon is the possibility of a government shutdown late this month. Certain politicians may grandstand and essentially force the government to close down.
Given the volatility in the market and the fears about China and the Fed hiking rates, a self-induced wound is something we could do without.
August was a tough month as the market took a negative hit. The VTI (US Stock Market) fell 6.09% and the international markets as measured by the VT (ex-US) fell 6.68%. Even the bond market did not end positive as the AGG (aggregate bond index) dropped 0.34%. The VTI is now down 2.70% for the year.
Fear over slowing growth in Chain and worries about the Fed’s first interest rate increase was enough to do the market in. China’s growth, especially in the manufacturing sector, appears to be slipping fast. China also devalued their currency which shook the market.The Shanghai Composite fell 12.49% for the month and is now down 36.49% over the last three months.
The SPY had been trading in a range between 204.40 and 213 since February. That range cracked on between August 21 and August 25. The SPY hit its closing low for August on the 25th at 187.29. That is down 12.17% since the May 21 close of 213.50. That put the market in correction territory for the first time since 2011.
Despite the bad news on China, our best guess at this time is that it will not have a huge negative impact on the US economy. The US economy continues to move along nicely and China represents only about 1% of US GDP. The market was long overdue for a correction and now we have it. It would be unusual for the correction to turn into a full-fledged bear market without a recession on the horizon. However, this does not mean there cannot be some more pain in the equity markets.