Alexander and the Terrible, Horrible, No Good, Very Bad Week for Stocks

Should we take it as an omen that this week sees the release of Alexander and the Terrible, Horrible, No Good, Very Bad Day what with the stock market getting pounded the way it has? And should we be surprised that Alexander and the Terrible, Horrible, No Good, Very Bad Day might not be a terrible, horrible, no good, very bad movie? Sure, it’s not getting unanimously good reviews, but 63% have been positive, enough to earn it a “Fresh” rating from RottenTomatoes.com. Bilge Ebiri of New York Magazine, for one, calls it a “minor miracle…It's funny, fast, and charming.” The Boston Globes‘ Tom Russo, meanwhile, says “the filmmakers come up with a modestly likable mix of zany and gently warmhearted.” With Box Office Mojo now redirecting to IMDB, we turn to MKM Partners’ Eric Handler, who notes that Alexander and the Terrible, Horrible, No Good, Very Bad Day should make about $18 million this weekend, enough for second place behind last week’s winner, Gone Girl.

The Walt Disney Company

With the pounding the market’s taken, I suspect investors will want to take in a movie just to forget this horrible week. The S&P 500 fell 3.1% to 1,906.13, the largest weekly drop since May 18, 2012, while the Dow Jones Industrial Average dropped 2.7% to 16,554.10. The Nasdaq Composite tumbled 4.5% to 4,276.24 and the small-company Russell 2000 slid 4.7% to 1,053.32.

Friday’s selling was particularly disturbing. Twice today the market sold off, only to battle back into the black. Then the selling really started to pick up, as the S&P 500 closed down 1.2%, the Russell 2000 finished off 1.4% and the Nasdaq Composite got hammered to the tune of 2.3%. Worse still, there was no catalyst for the selling, save for the meltdown in chip stocks after Microchip Technology (MCHP) warned of an industry slowdown.

But there’s a lot more going on out there, including fears of slower economic growth, Fed Rate hikes and the strong dollar, a subject I touched on last week in my Streetwise column. Citi Private Bank’s Steven Wieting and Shawn Snyder explain why a potential rate hike is causing so much consternation:

Long-term policy guidance from the U.S. Federal Reserve, designed to achieve added monetary accommodation and augment quantitative easing, is now absent…At any point since mid-2011, investors could say with good certainty that U.S. short-term rates would not be any higher than zero looking at least 12 months out. This helped suppress financial market volatility, and investors no longer have that certainty. Under such circumstances, corrections in asset prices – even if short-lived – may become more severe than recent experience.

BMO Capital Markets’ Brian Belski and Nicholas Roccanova think the market is overestimating the risks of a stronger dollar:

Over the past 15 years, the US dollar and stocks have exhibited a high degree of negative correlation. Unfortunately, this has led to a widely held opinion that strong US stock market performance requires a weak dollar. The view from a longer lens suggests a different story. For instance, year-over-year changes in the US dollar and S&P 500 have exhibited almost no correlation since 1974. In fact, when we examined different stages of the US dollar cycle since 1974, our work shows that the S&P 500 has been able to exhibit strong performance irrespective of the specific dollar-cycle stage.

True, US companies have become more dependent on revenue from foreign sources, and a stronger dollar certainly complicates the competitiveness of US products and services abroad. But even so, we still have found little connection between dollar strength and overall stock market weakness. In fact, it appears that current investor worries regarding dollar strength are warranted only in extreme circumstances.

Citigroup’s Tobias Levkovich is perplexed by the fact that investors think dollar strength will continue but that oil prices will bounce back, even as they expect the US economy to continue to grow He explains why:

Confusingly, clients expect the dollar to strengthen, but an oil price rebound is perceived by year-end 2015. Furthermore, most envision the first Fed rate hike in 2Q15 though a good number see it in 3Q15. The 10-year Treasury yield is broadly seen as ending next year in the 3.0-3.5% range with buy siders projecting nearly 7.0% EPS growth next year, in line with the Citi forecast. Thus, investment managers apparently buy into the sustained US economic recovery thesis.

Wells Capital’s James Paulsen thinks it’s time to buy European stocks, in part, because of the dollar’s recent strength:

Finally, the U.S. dollar has recently strengthened substantially relative to the euro. The euro-dollar exchange rate is now near the lower end of a range which has been in force for almost a decade. Consequently, U.S. investors can buy eurozone stocks today with a reasonable expectation returns could be boosted should the euro revive some in the next year.

Since the 2008 crisis, the best buying opportunities have occurred where fear dominates the pricing of assets (e.g., buying stocks in March 2009 against widespread fears of a run on the U.S. banking industry, buying the astronomical government yields available in Europe as most feared the eurozone was imminently coming apart, and betting against the U.S. going over the fiscal cliff). Therefore, despite a consensus of investors currently avoiding equities in the region, should investors consider take advantage of the contemporary panic and overweight Eurozone stocks?

It’s a thought.