I wrote last week how I believed that markets were due for a 4-8% pullback based on historical numbers. I also wrote previously how our country's economic health would be a primary factor (and if we started to correct it) in whether or not we had a normal correction (mentioned above) or something more fierce coming down the road.
Today (Monday) marked the 1st time in a long time that the market pulled back. The SPDR Index (SPY) pulled back over 1% to close below the $150 mark. It marked the first time in weeks the market actually closed down any significant number. But frankly I believe this is just the beginning.
Trade in Mexico wrote a very diverse article on this subject addressing many of the concerns I have as an investor both short- and long-term. Our debt has not changed, and in fact will get worse now that Obama has officially signed into law the bill to allow another $450 billion be allocated for interest payments and to avoid defaulting (for the time being). This is another example of an administration "kicking the can" down the road and not addressing our problems at hand. We are now guaranteed to have a higher than 100% debt vs. GDP sometime this year. Not exactly a healthy start to 2013, with 2012 being the 4th straight year of a trillion dollars or more being added to our debt.
See the chart above, the market has not corrected itself completely yet. As I showed in my previous article, based on instances such as these over the last year (and even longer), the S&P typically will pullback 4% or more from its peak levels. It has happened multiple times, especially when the trading maintains at or above its peak Bollinger Band (as shown above). Monday was a simple 1% or so correction. There is more blood in the water coming soon. It may take a week or so, but there will be more givebacks just on historical data alone.
Not only do I believe that the financial data shows us ripe for more of a pullback, I believe the other factors coming to light (and possibly coming down the road) will also affect the markets. The fact that our GDP regressed when we were expected to grow 1% will effect us. The market may not have allowed it to just yet, but it is just another pin prick that will eventually turn the market bloodier yet. If our GDP is not growing, and we are adding to our debt, that 100% level (compared to 57% in 2007 when the S&P was last around 1500) will grow higher still.
Speaking of blood, there are other factors I have not mentioned in my previous articles that make me believe that a major pullback (10% or more) could be on the horizon.
Unemployment: What better way to drive an economy than have everyone working? We are told the unemployment number as of December 2012 was 7.8%. I find this very hard to believe to be a real number, especially when you look at the graphs below:
(click to enlarge)
Compare the average amount of weeks a person was unemployed in 2007 (again peak of S&P) compared to today. It is nearly double! What this tells me is many folks either cannot find jobs and many are frankly just giving up looking. It is a shameful number, our country and the present administration (Democrats and Republicans alike) are not getting jobs back on our own soil. This is another pinprick in our health of our country. Now another key graph below.
In 2007, over 63% (not counting Armed Forces) were actively employed in our country. In 2012, nearly 10% less than that are. How can we actively grow our economy to even keep up with inflation if 10% less people are working today than 2007?
Credit: Anyone remember the panic in September 2012 when Moody's threatened to downgrade the U.S. credit rating? Does anyone think Moody's will not consider it anew now that we have done nothing to lower our debt and kicked the can down the road again? I am not one to follow forecasts or so called experts "outlooks". But I also know when there is enough smoke, there more often than not a fire. Here is one thing all three (Standard and Poor's, Moody's and Fitch) list for their outlook when it comes to the United States: Negative. I frankly don't blame them, we have shown no reason not be considered a high risk and I am surprised we haven't been downgraded lower than AA+ already.
International: As if we don't have enough bad news already, there are many world events that can effect our markets. For starters there is talk of North Korea and its nuclear test. There is the unstable Middle East with multiple stories and events brewing there, and also on the financial front, the eurozone issues. Any one of the above could cause serious problems to the global markets, with the euro issues looking like the most serious (to the market at least).
To sum up, I feel the market will still pullback another 2-3% to correct for the technical data no matter what we do to improve the financial health of our country. But without a serious change to our current "plan" of getting our debt and more seriously our spending under control, I believe there are too many pinpricks to not think we will not bleed, perhaps uncontrollably for some time.
Disclosure: I am short SPY.
Additional disclosure: I am long AAPL