A stock market crash in 2015 would not be unreasonable considering where the market has come from. Of the many things the stock market is, though, it does seem to be a discounting system with prices changing based on the expectation of a certain future reality.
Lots of stocks sell off on good earnings results. Case in point: open source software company Red Hat, Inc. (NYSE/RHT) recently beat the Street with its earnings report and the position sold off. It had already been doing extremely well on the stock market, up over 40% the last 12 months.
Generally though, this market continues to look tired—wary of a future where companies aren’t able to generate some earnings velocity in a slow growth world and with a stronger U.S. dollar.
Will Rising Rates Cause a Stock Market Crash in 2015?
Historically, it typically doesn’t pay to fight the Fed or monetary policy in regards to the equity market. And even with the prospect of a change in the course of interest rates, because they’ve been so low for so long, I think this market just isn’t worried by a quarter- or half-point rate increase over the next 18 months.
It was the expectation last year that rising rates would be a signal from the central bank that employment and the economy were on a path to sustainable growth on their own. Investor sentiment seemed to be that rising rates was actually bullish…and that’s still a fair expectation in my view, given where we’ve come from since the financial crisis.
What the Other Indices Say About This Market
The breakdown in transportation stocks has accelerated since May and it’s something to keep a sharp eye on.
The relative price strength in the Russell 2000 Index of small-caps, the NASDAQ Biotechnology Index, and the NASDAQ Composite (since May) don’t offer convincing evidence to me that this market is breaking down currently.
Continued price strength and leadership in the NASDAQ Composite are telling. It very well could be that price weakness among transportation stocks, after some very strong capital gains, signals only the end of the beginning of this bull market.
Within the context of a secular bull market, the U.S. economy could experience a technical recession and the stock market could experience large price corrections.
This stock market is still trading off the Fed and will likely continue to do so. Accordingly, valuations among the market’s existing winners should also continue to be unreal and modest financial results may not deter buyers. (See “Two Top Micro-Cap Stocks with Continued Momentum.”)
Corporate outlooks continue to be quite bullish for 2016; it will be interesting to see if this changes during the upcoming second-quarter earnings season.
The NASDAQ Composite just broke its Dot-Com bubble high in the face of lackluster earnings results and bland earnings expectations this year.
The market expects the Federal Reserve to continue to be dovish and, whether or not that’s a good thing, it won’t affect share prices. The central bank’s monetary reflation is still in full force.