Since the Federal Open Market Committee solidified plans to end quantitative easing in October, bears have been out in full force warning investors of impending doom. Well, their prophecies seemed to come true in early October, at least for a while.
On Sept. 18, the S&P 500 broke records again, topping out at 2,011 points with a total gain of 8.8 percent for the year. Then, as the ending date for stimulus spending approached, the S&P 500 dipped 9.8 percent by Oct. 15, 0.2 percent shy of a correction. Bears patted themselves on the back while lauding the market drop. Since then, the S&P 500 has erased this “correction” and has broken yet another record, reaching an all-time high of 2,039 points. What happened?
To start, the U.S. economy is a beacon of light in a stagnating world economy. Despite sabre rattling from Russia, economic sanctions and the slowdown of the Chinese economy, the U.S. has held up comparatively well. U.S. GDP grew more than 3.5 percent in the third quarter, while growth in the Eurozone stagnated at a mere 0.3 percent. This resilience has resonated with investors, pushing the markets back to mid-September levels.
However, analysts cite concern for an overvalued market along with the rise of jobless claims. The price-to-earnings ratio for the S&P 500 is currently at 16, well above its long-term average of 14.8. People without jobs rose by 12,000, indicating a larger number of layoffs. This month’s clearTREND U.S. Economic Health Index™ shows that only 52 percent of U.S. sectors are expanding, the lowest rate of expansion in more than two years. “Investors need to remember that the market is not the economy,” says Mark Scheffler, founder of The Appleton Group. “For years, we’ve heard warnings about the massive size of the stimulus and the national debt. But based on how the markets have responded in the past when stimulus has been removed, we should be much more afraid of the end of stimulus.”
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