By Michael Wursthorn and Corrie Driebusch
Investors are divided over whether the recent stock-market
volatility is the start of a larger selloff, but many agree that
the optimism that characterized the postelection rally is
waning.
The historic calm that enveloped U.S. stocks for much of this
year has been upended twice in the past two weeks. The Dow Jones
Industrial Average posted its biggest decline in three months on
Thursday, one week after a selloff of similar scale sent stock
indexes tumbling around the world. Investors are running out of
reasons to keep buying U.S. stocks, while at the same time warning
signs are accumulating, many investors, traders and analysts have
said.
They point to concerns about pockets of the U.S. economy, the
Federal Reserve's plan to raise interest rates and unwind its
balance sheet, and doubts that corporate earnings can continue to
grow at a solid pace.
New worries have emerged: The looming battle in Washington,
D.C., over raising the debt ceiling. Rifts within the White House,
and President Donald Trump's deteriorating relationship with many
business leaders in the wake of the Charlottesville, Va.,
demonstrations.
Billionaire investor Carl Icahn resigned his position as special
adviser to the president on Friday, saying he didn't want "partisan
bickering" to cloud the work of the administration. In his
resignation letter, Mr. Icahn made no mention of the rallies and
violence in Charlottesville.
Such divisions have magnified investors' doubts about the Trump
administration's ability to accomplish its agenda, including the
tax cuts they had anticipated would boost corporate profits. Those
expectations contributed to a stock-market rally that has sent the
S&P 500 up 13% since Election Day.
"How the market has behaved since Nov. 9 in many ways seemed
like a disconnect from reality," said Kristina Hooper, global
market strategist at Invesco. "Investors are starting to recognize
that."
Stock declines so far have been short-lived, with many investors
viewing them as an opportunity to buy into a market that has been
supported by global economic growth and solid corporate
earnings.
Nearly 33% of investors surveyed by the American Association of
Individual Investors said they expected stock prices to fall over
the next six months, the highest level since May. About 34% of
investors had a bullish outlook, according to the most recent
survey. More than 40% of investors had bullish outlooks for nine
consecutive weeks after the election, prior surveys said. AAII
polls its roughly 175,000 members weekly, asking them for their
take on the whether they expect markets to rise or fall.
U.S. auto sales, an important driver for the broader U.S.
economy, fell for the seventh-consecutive month in July, according
to Autodata Corp., suggesting a string of sales gains since the
financial crisis is plateauing.
Ms. Hooper is concerned about Americans' rising debt levels,
which she says in the long term make them more vulnerable to
economic shifts, such as a job loss or interest-rate increases.
U.S. household debt reached a record last quarter, driven by rising
mortgage debt, auto-loan originations and higher credit-card
balances, which reached their highest level since 2009.
Some analysts worry about growing debt among consumers because
it can suggest people need their credit cards to finance their
daily living expenses, while others say credit card debt is a
normal part of an economic expansion.
"Two things usually happen before markets get into trouble,"
said Bruce Bittles, chief investment strategist for Robert W.
Baird. "Interest rates go up significantly or consumers spend
more."
The Federal Reserve's annual economic symposium in Jackson Hole,
Wyo., this week could provide clues about global central bankers'
latest thinking. Chairwoman Janet Yellen is scheduled to speak, as
well as European Central Bank President Mario Draghi. Several major
central banks have signaled their intention to gradually tighten
monetary policy, though inflation has remained stubbornly low in
places like the U.S. and the eurozone.
The recent selloffs have coincided with some mixed corporate
earnings and rising global tensions, including threats between the
U.S. and North Korea and terror attacks in Spain.
The Russell 2000, an index of small-capitalization U.S. stocks,
and shares of transportation companies have underperformed -- a
sign that the broader market could be facing more declines,
analysts said. The index is up 0.05% for the year, but is down 6.4%
from a high hit in late July. The Dow Jones Transportation Average,
a 20-stock index that tracks some of the largest U.S. airlines,
railroads and trucking companies, has fallen nearly 6.7% since July
14.
According to stock-market lore, if the transports lag, it can
presage broader stock declines, as these companies represent the
breadth of the goods shipped across the country and are an
indicator of production and consumption.
"We're going to start to see deterioration" in the now
eight-year bull market, said Mike Wilson, Morgan Stanley's chief
U.S. equity strategist. "Transports not acting particularly good is
a very early warning sign that maybe next year may not be as
great."
Concerns over lofty valuations have caused some investors to
already trim their exposure to U.S. stocks, instead favoring
valuation multiples of companies based in Europe.
"The U.S. has been priced for perfection," said Steven Wagner,
chief executive of Aventura, Fla., advisory firm Omnia Family
Wealth that has moved more of its clients into European stocks from
those in the U.S. over the past year. "People are starting to get
uncertain and rethink" U.S. stock valuations, he added.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com and
Corrie Driebusch at corrie.driebusch@wsj.com
(END) Dow Jones Newswires
August 20, 2017 10:14 ET (14:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.