Stock market: a whiff of trouble or real trade signal

U.S. stocks on Friday suffered the worst slide since the UK’s unexpected decision to exit the European Union, with the S&P 500 falling 2.45%.Technically, S&P dropped below 50-day MA. The line is currently in the 2164 area and acts as resistance. Support is located at 2100 (psychological level) and 2090 (2016 support line).

The popular explanations for the current decline involve uncertainty surrounding the US elections; hawkish comments from several Federal Reserve officials concerning possible hike in interest rates; sluggish economic growth and pessimistic expectations about future cash flows coming from overcautious investors.

Does it mean that the aforementioned bearish tendency is long-term and the recession in the US economy is inevitable? I would tend to doubt it. The recent decline may merely indicate that share prices were grossly overvalued: S&P 500 currently trades at 25 times earnings, its highest multiple in seven years, while average P/E ratio over the past 140 years equals 15.6. In other words, stocks have risen too much and diverged from fundamentals. In addition, investors are becoming too pessimistic about the economic growth of the US economy, or they’re trying to somehow shield themselves from possible losses having raised bumps during the financial crisis of 2008. More economic news and more data concerning productive capacity of US companies will be needed to tell whether this market signal is the real thing, or just a false warning. One thing is clear: these wobbles in stock market is a good opportunity for investors to take a hard look at their portfolios and maybe reconsider their investing strategies.



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