The Fed sniffled, China sneezed, the emerging markets got sick and now stocks around the world are stumbling.
That's the easy read this week, with most equity averages around the world selling off, money barreling back into the U.S. Treasury markets and a renewed discussion over whether a long-awaited correction is finally at hand.
"'Contagion' is a word we're dusting off this week, says Dean Popplewell, chief currency analyst at Oanda. While he notes that the flow of money away from emerging market stocks and bonds has been going on for more than a month, he cites the Federal Reserve's "token taper" in December as a catalyst for the flight. Recent data signaling slower growth in China and the devaluation of Argentina's currency have been accelerants.
What's more, there is no reason to think calmer seas are imminent.
"The theme this year [with the Fed tapering] will be interest rate divergence," he says. "Expect more turbulence; central banks have a lot of balls in the air."
Friday's slide prompted the second straight 200-point intraday selloff on the Dow Jones industrial average, with
The 10-year Treasury was back to being a safe haven, with yields on the benchmark note falling to 2.73% from 2.87% earlier in the week. The 3% mark remains a psychological line in the sand, says Popplewell, with "a real fear factor rates will back up from that level once momentum builds."
Gold prices drew little benefit from the flight out of stocks, up slightly to $1,265 an ounce, while natural gas took off, rising almost 10%, and crude oil dipped about half a percent.
David Lafferty, chief market strategist at Natixis Global Management, thinks the myriad factors cited for the market slide are convenient excuses for a "necessary, refreshing pause." Throw in a soft batch of corporate earnings and sellers have plenty of reasons to take money off the table. But Lafferty's group will be opportunistic, he says, noting attractive values remain in the financial and technology areas
"Earnings have not lived up to strong growth indications of Q4 so far," he adds, warning that the upward trajectory of stocks will slow in 2014 even if the year still tilts positive. Lafferty is keeping an eye on inflation too, warning that the lack of price pressure has enabled the Fed to maintain its friendly monetary policy in large part. "But if inflation becomes a problem, the Fed becomes a problem," he says.
Sectors bearing the brunt of Friday's drop had a decidedly cyclical tilt, with industrials, materials and financials off more than 2% while consumer staples, telecom and utilities fell less than 1%. The biggest movers on the day included
The week's broad selloff is still muted in the context of last year's huge rally and a nearly four-year surge off the March 2009 bottom, but with the S&P down almost 3% on the year the chatter around a long-awaited 10% correction is back in full force.
Plenty of money managers have gone on the record lamenting the lack of attractive value in the market and their readiness to buy on any significant pullback. As the selloff continues, the question is whether they will pony up for equities or just roll out another familiar market trope: don't catch a falling knife.