Recently, the Dow Jones Industrial Average has been down 5.3% from its Dec. 31 record. Most market managers expect the market trouble to hang around for a while and also believe that things will not get much worse. However, there are still two sides to the debate. The other side that predicts a volatile market still has strong reasons for their claims.
Furthermore, the largest contributing factor to the performance of the stock market is the economic trouble that many developing countries are facing. If conditions end up worsening in emerging market economies, markets could fall further. However, few professional investors seem to share these fears. They view the pullback as a natural occurrence- like a storm that hits about every year. Even though the Dow hasn’t fallen 10% since the middle of 2011, investors are even talking about percentages larger than 10% without sounding too upset because they anticipate that stocks will finish with gains at the year’s end.
The optimists “generally believe the U.S. economy has cut costs and made other adjustments that will let it keep rebounding, even as developing countries suffer because they aren’t prepared yet for a world with softer demand for their commodities, components and other exports”. These money managers encourage their clients to buy even in bad conditions when prices fall. Overall, the notion of investors in the WSJ article was that they were not worried about long-term conditions. Their perspective was also justified by the fact that if markets continually go up, you will get bubbles. They believe that it is the occasional weakness that keeps them on their toes.
Moreover, as a reaction to the anticipated stock market risk, treasury-bond prices have risen because investors have ran to them for safety. With the Fed’s recent reduction in financial stimulus, many investors think interest rates will rise on future bonds- which means the prices of existing bonds will decline.
To the contrary, those who anticipate the stock market to become less-bullish in the near future make a valid argument. Much of the risk is contingent on the conditions in emerging market currencies. This was a prime reason to why the Dow had its worst week since 2011- investors fled risky assets. Also, the value of the Argentinian peso plunged and China’s huge manufacturing sector has been showing signs of weakness. Overall, I personally believe that volatility decline in developing markets will be the key factor leading investors to buy again.