Investors and traders will be back in full swing on Tuesday following the end of August and Labor Day Weekend holidays.

Stock Market into Correction Territory

Since our last newsletter, the stock market took a hard and fast move down into correction territory. While we have been talking about a market correction for some time, they always seem to come from nowhere and are always unsettling.

The problem with a correction is you never know until it is over whether it is just a correction or the start of a prolonged bear market. Over the past two weeks and especially after the market didn’t come shooting back, more voices were chanting the bear market chorus.

Their reasoning is that as China goes so does the US and the Chinese stock market has dropped substantially. Falling oil and commodity prices, the persistently strong dollar, and a Federal Reserve that may raise rates this month have led to some even predicting that the US will soon fall into a recession.

Until proven otherwise, the economy remains ok and the stock market is still in a bull market

I’m not in the recession camp and I think until proven otherwise, the economy remains ok and the stock market is still in a bull market. This doesn’t mean there are not concerns out there and constant evaluation is prudent. However, it seems premature to declare a recession when the US just posted a better than expected second-quarter real GDP growth of 3.7%, wages and home prices are rising and unemployment is falling.

Better than expected GDP

The GDP number grew better than expected even considering that the energy sector has been hit hard by falling oil prices. If energy were better, the economy would presumably have been stronger.

Short-term interest rate increases won’t bring the house down

I also find it hard to believe that a 1/4 point increase (from zero) in short-term interest rates will bring the whole house down. We have not seen a rate increase in many years so it is understandable that there is uncertainty surrounding the outcome of the Fed’s decision, but I’m trying not to lose sight of the bigger context within which the Fed’s decision is being made.

A slower China

China may well be the biggest problem, but here too I think it is difficult to extrapolate a worldwide recession coming from a slower China. These fears were ratcheted up by the recent decline in Chinese stock prices but those prices should not have been so high in the first place. We are talking about a market that doubled in a year’s time and now has gone back to essentially where it began in 2015.

Is it a harbinger of things to come? Maybe, but China is in a long-term economic transition from being an exporter to being a consumer, and that takes time, with many bumps like this along the way.

Am I concerned about China? Yes.

Will it derail the US bull market right now? I don’t think so.

Look for Buying Opportunities

If the US market is in a correction then there are buying opportunities and chances to prune and adjust accounts. This is what I am doing now. When the bulls and bears hit the floor Tuesday, we will begin to see the picture a bit clearer.

— Ian Green, Pendragon Capital Management

Subscribe to Pendragon's Newsletter

Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.