On Tuesday the local market suffered its biggest one day fall since August last year, after US markets plunged over 2% in response to fresh worries about the state of the US economy. The sell-off has been caused by a stream of recent data which has concerned investors that the US economic recovery is stuttering. This weak data included manufacturing data that showed a reading of just 51.3 – an eight-month low; and auto sales and construction spending figures that also disappointed investors.
US markets are now down around 6% since the start of the year, while the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has fallen nearly 5%. Although undoubtedly sudden, corrections such as these should be kept in context.
Firstly, the S&P 500 rallied nearly 32% in 2013, while the S&P/ASX 200 gained around 15%, so the current declines come after a period of significant gains.
Secondly, as a number of commentators have been warning for some time, markets have rallied well ahead of earnings and it is now up to companies to actually meet expectations. Those earnings results are starting to come in and it's a mixed picture which is naturally going to lead to adjustments in the pricing of stocks.
Importantly, for level-headed investors, market uncertainly and volatility can create opportunities. For example yesterday the wider market fell 1.75%, however the following three companies fell significantly more.
- AMP Ltd (ASX: AMP) fell 2.8% to $4.12
- Brambles Ltd (ASX: BXB) fell 3% to $8.75
- QBE Insurance Ltd (ASX: QBE) fell 3.3% to $11
The 1.75% decline in the index equated to over $26 billion in value 'wiped-off' the market. Likewise the falls in AMP, Brambles and QBE equate to hundreds of millions of dollars in 'lost' value. Did the long-term earnings power of these companies really decline in just one day? Or did the price investors were willing to pay on the day simply change? Arguably it was more of the latter than the former.
Foolish takeaway
Market sell-offs will naturally result in some stocks being sold-off more than others. The decline in prices of some (perhaps most) is often justified, but nearly always there will be some good companies that get thrown out with the bad. Savvy investors will be watching the major decliners' lists closely if the market continues to head lower as this is bound to create opportunities.
