Signs of a Correction

Although the long-term economic picture remains sanguine, a number of global risks and economic results point to a temporary period of consolidation in equity markets.

April 17, 2013   |    By Scott Minerd

Global CIO Commentary by Scott Minerd

Market internals are eroding and volatility is increasing. From the deterioration of the situation in Europe to slower growth and bird flu in China, there are several major risks on the global macro landscape. At some point, these foreign storms will reach our shores. Recent downturns in the markets have demonstrated how vulnerable asset prices have become to the arrival of bad news and data that does not meet expectations. Adding all of this up, it appears we are in the early stages of a broad consolidation.

Equities are priced for perfection. We don’t need the end of the world for a correction, just something less than perfection.

ScottMinerd

Recent data on the transport sector confirms the view that the equity market has gotten ahead of itself. A divergence of transport stocks against major averages, such as that which we are currently seeing, usually signals a changing trend in the near-term. This probably means equities will be 5% to 10% lower by the summer, and we will see some modest spread widening in credit, perhaps 10% to 15% wider than today’s levels. There is less risk for Treasuries because any perceived slowdown in economic expansion will be interpreted as increasing the likelihood of extending quantitative easing.

Transports Lead the Way

Dow theory posits that the strength of the transportation sector indicates the direction of the broader economic trend and overall market. Over the past 12 months, weakness in the transportation index has consistently been followed by corrections in the industrial index. With the divergence between the transportation index and the industrial index increasing again, the possibility of a near-term correction is rising.

THE DOW JONES TRANSPORTATION AVERAGE INDEX VS. INDUSTRIAL AVERAGE INDEX

THE DOW JONES TRANSPORTATION AVERAGE INDEX VS. INDUSTRIAL AVERAGE INDEX

Source: Bloomberg, Guggenheim Investments. Data as of 4/16/2013.

Economic Data Releases

Consumer Indicators Disappoint as Housing Data Mixed

Eurozone Production Expands, Growth in China Slows

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.



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