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The bull is sleeping ... it's not dead

June 25, 2013: 12:34 PM ET
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Market optimists may be taking a nap. But it doesn't look like the turmoil in stocks and bonds is a sign of an impending crash.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

We all know that bears hibernate. But what about bulls?

It's been an unnerving couple of weeks for investors. The Dow is off more than 5% from the all-time high it set on May 22, while the S&P 500 is down nearly 6.5% from the record it hit on that same date. But despite all the talk of fear and volatility, it's been a fairly orderly sell-off.

Related: CNNMoney Fear & Greed Index continues to show Extreme Fear

The worst of this recent slump for stocks was last Thursday, one day after Federal Reserve chairman Ben Bernanke gave his clearest explanation yet about when and how quantitative easing would end. But even though the Dow dropped a scary-sounding 353 points, that only worked out to a 2.3% drop. And the S&P 500 only fell 2.5%. That's hardly a panic.

Remember 2008? The Dow and S&P 500 had much worse daily drops back then.  And the markets in Japan and China have been far more volatile lately. The Shanghai Composite fell more than 5% Monday. In Japan, the Nikkei has had several drops of more than 5% in the past month.

The lack of a truly bloodcurdling decline for the Dow, S&P 500 and Nasdaq (so far at least) could be a promising sign. It may mean that, despite worries about emerging markets, Japan and Fed tapering, the recent weakness in U.S. stocks is nothing more than a long-awaited correction. It's not the beginning of a brutal bear market.

"This is healthy. We've had such a big run-up. We needed a pullback here," said Bob Landry, executive director and portfolio manager at USAA Investments in San Antonio.

Yes, the spike in long-term interest rates is alarming to traders. Wall Street is clearly not looking forward to the Fed taking the floaties off the bond market and asking investors to swim on their own. But a 10-year Treasury yield around 2.6% is not exactly something that should cripple demand for loans. And if rates go up because the economy is getting better, that's a good thing, not bad.

"If rates move higher out of economic strength, that's fine. It's coming off unusually low numbers," said Christopher Baggini, manager of the Turner Titan fund in Berwyn, Pa. He adds that investors should not truly be worried about long-term rates unless they moved closer to 4%.

So the key will be whether or not they settle around these levels or if investors continue to dump bonds and push rates even higher.

Richard Ross, global technical strategist with Auerbach Grayson in New York, thinks the bond sell-off is pretty much done. And it was needed as well.

After all, bonds were arguably as ahead of themselves as stocks this year. It was less than 2 months ago that the 10-year was at 1.6%. That's not that far off from the all-time low of just below 1.4%.

"A lot of the froth is now out of bonds and stocks. The market was overbought and some of the complacency has been removed," Ross said.

Related: Bonds in the bargain bin

So where do stocks and bonds go from here? Landry said the U.S. should benefit from the fact that its macroeconomic challenges seem to pale in comparison to that of Japan, China, Brazil, Europe and just about any other market out there.

"The U.S. economy is not doing all that badly. The data generally paint a picture of an economy that, while not booming, seems like it's slowly improving," he said.

Ross agrees, and that's why he's urging investors not to blow the recent volatility (which often happens in the summer months) out of proportion. He added that many investors have been saying for months that the stock market was due for a dip. So this should not be a surprise.

"Everyone has been waiting for a pullback and now that it's happening they start thinking that the market is going out of business because it looks bad. It's supposed to look bad," he said.

Of course, this doesn't mean that it's now smooth sailing. Many experts expect more volatility ahead.

The China credit crunch fears are unlikely to go away overnight. And investors are still trying to figure out what the Fed is going to do and when. It's going to be bumpy. But Baggini said investors who can stick out the tough times should be rewarded.

"If your time horizon is in weeks or days, then it's not a good time to be in the market. But if it's longer than that, it's a great opportunity," he said.

Editor's note:  This is my last column for a month. Baby Buzz 2.0 awaits! Starting Thursday, I'll be out on parental leave until July 29.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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