Markets: Are recession fears driving down stocks?
Stock market investors “seem to be searching for a reason to sell,” said Stephen Gandel in Bloomberg.com. The benchmark S&P 500 officially dipped into correction territory this week, down more than 10 percent from its recent high. Why have markets been falling? The sell-off “appeared to be launched by fears of rising interest rates.” Then growing trade tensions between the U.S. and China “were the new No. 1 concern.” Now the worry is that a tight labor market and resurgent inflation, together with price-hiking tariffs, “will slice into bottom lines.” Only one problem: None of these is actually cutting corporate profits, yet. Of the companies that have reported results so far this quarter, 70 percent announced higher profit margins than last year.
The price-earnings ratio of the S&P 500, a measure of where share prices stand relative to profits, is better than its five-year average. In fact, stocks are the cheapest they have been in more than three years. Nonetheless, investors are increasingly skittish.
Investors’ fears have “shaved trillions of dollars off the value of major U.S. stock indexes,”said Akane Otani and Corrie Driebusch in The Wall Street Journal. Investors question how much longer the nine-year-old U.S. economic expansion can last, and fear that a recession is coming. So they’re punishing even companies that report solid results. Take Amazon: It made nearly $2.9 billion in profit from June to September, 11 times as much as in the same period last year. But the firm’s shares fell 7.8 percent when those new figures came out last week, costing Amazon about $70 billion in value, because “its sales fell just short of expectations.” With the financial boost from the 2017 tax finished, investors think this might be as good as it gets. The market is pricing in the strong chance of recession—the investment bank JPMorgan Chase estimates the chance of one happening in the next two years at 60 percent.
“If the price of milk or a car or an Apple iPad dropped 10 percent, would you sneer? Or would you run out and buy it?” asked Thomas Heath in The Washington Post. Well, same with the stock market. Right now, stocks are on sale. If, say, you were thinking of buying Netflix at $381, you should want to buy it more at $300. Every correction is nerve-racking, said Sean Williams in TheMotleyFool.com. But since 1950 the U.S. has had 37 of them, one every 1.9 years. Markets bounce back, “usually within a span of months.” And if you have a long-term investing time frame, the chart is clear: Even 1987’s Black Monday—when the Dow fell nearly 23 percent, the largest one-day trading decline in U.S. history—“now looks like nothing more than a blip on the long-term chart.”