The U.S. stock market just watched a valuation correction last month. The S&P has dropped as low as the 1,867 on August 25 a 12% correction from its recent highs. Some of the main factors for the correction can be clearly indicated, the slowing growth in China, the sudden decrease in commodity prices especially the sudden drop of oil prices, and the possibility of an interest rate hike by the Fed.
The market confusion and fear caused by the intensified worries about the Chinese economy and the possible spillover into other markets, with the immediate triggers being weak manufacturing PMI data in China and an unclear Chinese strategy response, cheaper currency also triggered a huge wave of fear on Wall Street the devaluation of the Chinese Yuan caused what was called the black Monday. Major indices fell sharply, big downward movement not seen since the financial crisis in 2008 with Dow Jones Industrial Average falling as much as 1,000 points in the beginning of Mondays session only to rebound and cut half the losses by the end of the day.
People Bank of China (PBOC) the central bank in China interfere,d although some might say a bit late applying new regulations to control the market and prove that the Chinese financial market is stable, this gave a boost of confidence that the Chinese are serious about regulating their financial markets and from a month till today the markets in china have been relatively stable with no major moves that might cause worry to global investors. I think the worst is over, with markets in China no longer a major worry to investors after the stability we saw the past month, which again proves the effectiveness of the regulators of the markets in China.
Now moving on to the next point, which is the fear of a rate hike, I think this assumption is slowly fading away at least for this year. As many might suggest I think the Fed will hold on raising rates at least for this year it won’t take a risk to put the American economy back into recession especially with European Central Bank (ECB) and the Bank of Japan (BOJ) lowering their rates and continuing with quantitative easing programs. Another factor the Fed will have to take into consideration in its next meeting is the disappointing September jobs report, with only 142,000 jobs added versus 200,000 expected by economists and analysts. Equities were deep in the red Friday morning after the report came out, with the S&P 500 Index, Dow Jones Industrial Average and Nasdaq Composite each down about 1.5% after the first half hour of trading. But not for so long and since the new trend on Wall Street in bad news is good news, the same disappointing jobs report that caused the markets to drop boosted them up and they all closed in the positively after the sharp fall.
The disappointing jobs report signals that the American economy is still a bit weak in contradiction with what Fed is signaling and what many economist believe is true, a factor the Fed should take into consideration in the next meeting and since Janet Yellen always says that she and the Board are data dependent this lowers the possibility of rate hike this year.
Q3 earnings are just around the corner with major companies reporting their quarterly earning these earnings might be a signal of how the last quarter of this volatile year will be, with good earning reports this quarter can act as a catalyst for equities to make up the severe losses that occurred through this year, and who knows maybe the major indices can end in the positive territory for the year.