Ramblings of a Portfolio Manager or The pause that refreshes.
The equity markets are pulling back significantly today on fairly light volume. Pundit explanations range from a stronger dollar, to the re-election of the US-hostile Iranian President, fears that China’s stimulus may be insufficient to drive a worldwide economic rebound, the Obama Administration’s plan to give greater powers to the Federal Reserve, stretched stock valuations, concerns that we have “come too far too fast,” the possibility that the Fed may “take away the punch bowl” in the form of raising interest rates, the possibility of higher oil prices choking off a recovery, deficit concerns, dogs and cats seen sleeping together and the failure to mow the grassy knoll. We note that the sell-off is across all sectors, with basic materials and energy hardest hit but also including defensive sectors such as healthcare and consumer staples.
Is this the long-awaited pullback? Probably. Should we care? Probably not. Last week we highlighted our thesis that the Market is climbing classic wall of worry. We would argue that the concerns cited above constitute a well constructed wall. Market pullbacks are a normal part of climbing that wall. The reality is that stocks move on the “second-derivative” rather than the absolute. That is, stocks rise or fall depending on whether things (i.e. the economy) at the margin are getting better or worse relative to where we have just been. The second derivative turned from negative to neutral sometime in late March and since then it has been positive. There is no data to imply that is has gone negative again and the fact that all sectors are under pressure suggests that this is a normal round of profit-taking in a longer term upward trend.
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