Dramatic events reset agendas. People re-evaluate probabilities about what is possible as well as the personal implications. Because the recent market story is so big and so fresh the week will start with the punditry asking:

What are the lessons from the market turmoil?

 

Prior Theme Recap

In my last WTWA I predicted that everyone would be asking whether the recent market decline was the start of something big. Monday’s 1000 point opening decline in the Dow underscored the theme. The next day the story continued with a failed rally. At that point, few would have guessed that the market would finish in the plus column for the week.

As he does each week, Doug Short’s recap explains this dramatic story and his great weekly snapshot lets you see it at a glance. With the ever-increasing effects from foreign markets, you should also add Doug’s Doug Short’s recap to your reading list.

 

As Doug notes, the rebound stalled at the end of the week. CNBC quit running the “Markets in Turmoil” special report and went back to reruns of American Greed. Attention then turned to my secondary theme – the early reports from the Fed conclave at Jackson Hole.

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can try it at home.

Last week some advance planning was especially important. There was little time to react intelligently.

This Week’s Theme

Big events refocus attention and redefine the public agenda. They change our minds about what is possible, what is likely, and what to worry about. This week will start with more discussion about the meaning of the market turmoil and what, if anything, individual investors should do about it. The question for each producer or editor in financial media will be:

What are the lessons from the market turmoil?

It is a fertile topic and worth exploring. It should keep interest piqued until late in the week when the jobs report and Fed implications regain center stage.

So what were the lessons?

The Viewpoints

What you “learned” from the market turmoil seems to vary based upon your starting viewpoint. See Josh Brown’s recap of editorial cartoonist’s take on the market, including this one:

The conclusions once again cover a wide spectrum, with authorities lining up on all sides. Here are contrasting takes on several different topics.

On the Overall Economic and Market Health

  • Steep declines revealed the inherent weakness in the economy, stock valuations, and Fed policy. Worldwide weakness will drag developed countries into a global recession. Central banks will have no bullets left. The selloff and rebound provided a big warning to the wise.
  • The “correction” was over. That is what we have all been waiting for. Economic growth and the stock market rally can resume.

    • On China

  • We can now see how important the weakness in the Chinese economy really is. (Typical piece on this theme from Bloomberg, also running a bearish cover this week).
  • The Chinese threat has been examined and the effects analyzed. The impact is limited.

    • On the Fed

  • The Fed can finally see the error of its ways, but really has nowhere to turn.
  • The Fed is ready to move, but acknowledging some concern about worldwide markets.

    • On Personal Finance

  • It is time to sell. Major investors who had hedges in place last week showed significant profits while everyone else was crushed.
  • The volatility did not matter if you held firm. Hedges were difficult to cash in.

    • As always, I have my own ideas in today’s conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

    Last Week’s Data

    Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  • The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  • It is better than expectations.

    • The Good

    There was some good economic news, especially GDP revisions.

  • GDP revisions were strong, raising the bar for expectations. The change was so great that the “old news” had a market effect. Scott Grannis notes that recent growth of 2.7% is significantly better than the former trend of 2.2%. Despite this, it is still $2.8 trillion per year below trend. Few are thinking about the effects of a return to trend, not to mention an overshoot.

    •  

  • Consumer confidence is very strong according to the Conference Board survey. The Michigan survey was a slight miss, but see below.
  • New home sales show a solid y-o-y gain of more than 21%, despite showing a slight miss for the month. Calculated Risk has the full story, including this chart:

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  • Sentiment on many fronts

    • Negative among short-term market timers (Mark Hulbert highlights this contrarian indicator)

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  • The best market timers, by contrast, are bullish. (Also from Mark Hulbert). They have an equity exposure 84% higher than the worst performers in Hulbert’s database.
  • Insider buying was at the highest level since 2011 (Bloomberg)

    • The Bad

    There was also some negative data last week.

  • Personal income and spending. Income was OK, but spending slightly missed the seasonally-adjusted expectations. Steven Hansen at GEI provides the complete picture, with a slightly more optimistic take on year-over-year data.
  • Pending home sales showed a slight miss, while still gaining 5% on a year-over-year basis. (Calculated Risk).
  • Michigan sentiment disappointed slightly and declined. Given the stock market decline, those in charge of the survey thought the results held up pretty well. This one was especially interesting because the data represent later polling than the Conference Board report. NY Fed President Bill Dudley noted this in answers to questions following a speech. Fed observers seem to be watching this closely. As always, Doug Short (and Jill Mislinski) have the full story including both analysis and plenty of charts. It is useful to look at both the Conference Board and Michigan surveys, which usually show a high correlation.
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