Are skeptics' qualms on stock market slowdown valid?

Just three weeks after stocks reached all-time highs, the market has turned volatile and investors have gone from cheerful to suspicious.
Published: February 5, 2014
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It’s a skeptics’ market now. Just three weeks after stocks reached all-time highs, the market has turned volatile and investors have gone from cheerful to suspicious.

They’re worried about reports of slowing growth in the world’s largest economies, disappointed by earnings that never seem good enough and concerned about the stock market’s frequent triple-digit swings.

It isn’t a surprise to most money managers, who expected this year would be rougher after last year’s almost 30-percent surge. The fact that the volatility started so early caught some investors by surprise.

Even with major indexes down 5 percent or more, there is room for optimism. There’s no sign the economy will backtrack into a stock-killing recession and any big stock-market drop is unlikely to last long.

Here is a look at the stock market’s vital signs.

EARNINGS LESS ROSY: So far this season, 44 companies have cut their earnings forecasts for the year while 10 have raised their outlooks, according to FactSet. It’s not a good sign. Stock prices are derived from the earnings that a company generates, or will generate in the future.

Investors bid up stock prices in the last three months of the year in hopes that the improving economy would translate into higher company earnings. But if companies continue to cut forecasts, it means stocks are too expensive and investors will have to reevaluate.

•ECONOMIC HEADWINDS: At the start of 2014, many investors believed the U.S. economic recovery was accelerating and that Europe was stabilizing. Recent data has cast doubt on that.

The U.S. government said the economy created only 74,000 jobs in December, far below even the most pessimistic of expectations. And a private survey of U.S. manufacturers showed factory activity unexpectedly slowed in January — due in part to the cold weather affecting most of the country.

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NO RECESSION EXPECTED

The U.S. economy grew at an annual rate of 3.2 percent in the final three months of 2013, and there are no signs that it could slip back into recession. The Federal Reserve has started cutting back on its economic stimulus program, citing the recent strength in the U.S. economy.

“U.S. economic growth is not slowing down; it’s just not accelerating as much as it was previously,” says Krishna Memani, chief investment officer at Oppenheimer Funds.

As long as there is no risk of a recession and company earnings continue to expand — fourth-quarter earnings are up 7.9 percent from a year earlier — any fall in the stock market would be minimal.

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