Today marks the third time this year that the S&P 500 declined by greater than two percent in one day; surpassing the two times that it occurred in 2013. If it wasn’t clear already, the investment framework that was used in 2013 is no longer applicable to portfolios in 2014.
To recap, the S&P 500 Index fell by 39.1 points to close at 1833.08; a level not seen since February 20th. The index is off by 0.83% on the year and -3.38% from its all time intra-day high achieved one week ago after the Employment Situation reports were released.
On the surface, this is nothing more than a mild pullback; the low seen in February 2014 is still five percent lower than where the S&P 500 closed today. However, the majority of the stocks that fueled equity markets in 2013–and even in 2014–are off by significantly greater percentages. Is this a rotation out of the momentum names and into more “value-oriented” equities or the beginning of a general pullback?
The chart above speaks for itself and the equity market continues to plateau. In the short-term, we should expect the continuation of this pattern. Our strategy will continue to focus on working within the range; adding equity exposure around 1800 on the S&P 500 and reducing exposure near the all-time highs. We will be mindful of any movement below 1785 as this may be an indication of something larger.
On a longer time frame, there are serious headwinds for equities (e.g. the Taper, economy, trend reversion). I’ve blogged about important inflection points on several economic indicators recently and in a future post, I’ll comment on the flattening of the Treasury curve.