Investors are right to be worried – we’re heading for a correction

After months of gains, markets are starting to get jittery. And it's not just stocks - oil is back on the slide, too. John Stepek explains why investors are right to be feeling a bit nervous.

When the market bottomed out, it stopped falling on bad news. Investors would shrug off news of mass job losses and plunging house prices with barely a care in the world.

But now that valuations are looking a little bit peaky in some of the more economically-sensitive stocks, many investors aren't feeling quite as gung-ho. "The market is very susceptible to anything that puts into question the recovery," as Barry Lorenzo of US investment bank Kaufman Brothers told Marketwatch.

And it seems the latest US housing data was just the thing to knock the bulls off their stride...

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Investors are right to feel skittish now

The National Association of Realtors (NAR) in the US reported that sales of existing homes fell by 2.7% in August, having risen for four months in a row. The worse-than-expected news has been largely blamed for yesterday's stock market falls on both sides of the Atlantic.

You wouldn't think that such a relatively minor bump would be enough to take the wind out of the market's sails. But there are a few reasons why investors might feel a bit skittish at the moment. For one, we're not through the traditionally wobbly autumn patch yet September can be a sticky month for markets, but October's often pretty grim too.

For another thing, anyone who's been invested since March must be starting to get a bit concerned about locking in some of those profits now. You often hear about the psychological pain of those still sitting on the sidelines the fabled 'wall of money' argument. But it's easy to forget the flipside the money that's already in the market and is now sitting on a 50%-odd gain. Those investors are feeling a different sort of psychological pain should they take the money off the table now before it's too late, or let it ride?

Bad news for the housing market looms ahead

But these are generalities. Perhaps more pertinent is the fact that the weak housing data might have reminded investors that US housing is currently on a life support system which is due to have its plug pulled in November. At the moment, first-time home buyers benefit from an $8,000 government subsidy. That ends on November 30.

Will that be bad for the housing market? Well, according to the NAR, first-time buyers accounted for about 30% of sales in both July and August. So the short answer is, yes, almost certainly. And given that US housing is in simplistic terms where this whole thing began, the notion that it could head for a 'double dip' is understandably worrying for investors.


  • Why UK property prices are going to fall 50%
  • When it will be time to get back in and buy up half price property

Chances are of course, that the scheme will be extended. The last thing Barack Obama's boys want is to see the US housing market take another tumble. It's the most visible sign of whether their recovery is actually going according to plan or not.

So it's probably reasonable to expect more dollars to be pumped into the US housing market which is one reason why if you've ever craved a holiday home in Florida, now's probably not a terrible time to make your move (you can find out more on this in our recent cover story on US property: It's a perfect time to buy a house or two in the US).

Why oil looks set to slide further

Stocks were far from the only assets feeling the jitters yesterday. Crude oil futures took a tumble too, sliding to below $66 a barrel. US inventories of pretty much all oil and petroleum products rose last week, according to the Energy Information Administration. This shows that "oil consumption is in no way recovering as well as the broader economic conditions are," according to Sucden Financial Research analyst, Nimit Khamar.

This notion that broader economic conditions are recovering is an interesting one. Things might be getting 'less bad' but in truth, the only 'indicator' that's really taking off is the stock market. Bulls often like to point out that the stock market doesn't necessarily need the economy to be strong for it to put in a good performance, which is a fair point. But at the same time, investors tend to assume that a rising market means that the economy must be getting better.

As MoneyWeek regular, Pali International's James Ferguson, points out in this week's Roundtable cover story: Just how long can this rally go on?, a rising market feeds off itself (you can read it in the latest issue, out today - if you're not already a subscriber, subscribe to MoneyWeek magazine). People see the market going up, and they start to believe that it contains genuine information. After all, if the market's efficient and the market's always right, then if it's rising, an economic recovery must be just around the corner. And if a recovery is just around the corner, you want to be buying stocks. So investors buy stocks, driving the market up even further.

Of course, then they see the market rocketing, and assume that this means the recovery is going to be even stronger than anyone expects. Which means you should be buying even more stocks. After all, who are you to question the market?

But eventually the market reaches a point where it's supremely vulnerable to disappointment, and investors start to expect some sort of genuine economic recovery. And when they're disappointed, we're likely to see all sort of assets take a tumble, stocks, oil, and even gold at least in the short-term.

In any case, we've been saying for a while that the crude oil price is more likely to see the $40-$50 region before it sees $100 again. But it's still possible to make decent money in oil stocks. For some tips on which ones to look at following the recent boom in oil discoveries, see: Explorers strike black gold.

Our recommended article for today

Which profit measure is most useful?

The value of a company ultimately comes down to one thing how much profit it makes. But there are lots of different ways to measure profit, and not all are helpful to investors, says Tim Bennett. Here are the pitfalls to watch out for.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.