It’s bloody Monday. Absolute mayhem. Apocalypse now. Or maybe it’s not such a Doomsday scenario? The Dow’s 1,000 point plunge Monday morning caught everyone off guard, but Chicken Little doesn’t need to cry that the sky is falling. Here’s what you should know in the wake of the correction:
- Asset managers are looking to buy. “Corrections are healthy and we were definitely due,” says Chris Sunderland, institutional portfolio manager at Eaton Vance. Monday’s sell off was similar to the correction in August 2011, says Sunderland. It isn’t an indiscriminate flight to safety, and the oversold funds give asset managers a big buying opportunity. “We’re not by any means heading to a global recession,” he says. The markets will adjust to the correction, and we could see another great quarter, like the one that followed in 2011.
- IPOs likely to slow and prices will ease. The end of August is quiet for the markets anyway, so companies aren’t rushing to IPO before the long weekend in September. Companies including SoulCycle, Neiman Marcus, and Ferrari are heading to market next month. But with negative returns on recent IPOs, “expect to see a lot of valuation sensitivity on the part of IPO investors and a slowdown in issuance,” says Kathleen Smith, manager of IPO-focused ETFs for Renaissance Capital. “Valuations are being reset downward for the entire market, including newly public companies.”
- M&A isn’t going away. “I don’t think the volatility of the last few days is a harbinger of the end of the M&A boom this year,” says Steve Levitt, co-founder of Park Sutton Advisors. Money managers aren’t expecting a prolonged correction, meaning this is just an issue of volatility, says Levitt. But there may still be a bit of skittish behavior from companies. “The people that run companies are human beings too,” says Sunderland. Businesses will inevitably adjust spending and contemplate cutting dividends until things normalize, he says.
- Market moves are forcing China’s hand. China triggered fears when it devalued the yuan two weeks ago, signalling that it probably hasn’t been totally honest about the country’s economic situation. China knows that it’s going to have to make changes, such as investing more in infrastructure, to calm investors, says Sunderland. China has started making such moves, announcing Sunday that pension funds managed by local governments will be allowed to invest in the stock market for the first time.
- The European Central Bank needs to rethink its strategy. As stocks have dropped, the euro has bounced up to $1.15 Monday, its highest value against the dollar since early February. But the ECB was counting on the weaker euro to boost inflation in Europe. Wall Street Journal
- September is looking less and less likely for an interest rate rise. People are jumping on the Jeff Gunlach bandwagon, saying September is no longer looking viable for a Federal Reserve interest rate rise. “We’re being overrun right now by the global concerns,” says Sunderland. Between China, the drop in oil, the lack of inflation, and the Fed’s already wavering attitude, September just doesn’t look likely, he says.
Photo: Lauren Tucker