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Making Sense Of The Market Crash With Jeremy Siegel

Making Sense Of The Market Crash With Jeremy Siegel by Jeremy J. Siegel, Senior Investment Strategy Advisor, The WisdomTree Blog

I made a call for a 10% correction in the markets roughly three weeks ago, which was followed by a more-than-10% sell-off in the S&P 500 between August 17 and August 26, 2015.

Considering the uncertainty of short-term moves in the market, my call for a correction was an uncharacteristic one. What concerned me the most was the dismal earnings picture: while analysts were calling for a 10% increase in 2015 earnings late last year, estimates have progressively been shaved down to a 1%–2% earnings contraction in the course of the year. Given that the U.S. is not in recession territory, an earnings contraction is unusual. Both U.S. dollar strength and lower oil prices have been large detractors for corporate earnings. Given that 40% of profits in the S&P 500 are derived from abroad and 25% of profits come in foreign currencies, analysts estimate that 2014 earnings took a $5 hit from the stronger dollar. Furthermore, some estimate that weaker oil prices have resulted in a $7 hit. The other warning sign was the abnormally depressed Volatility Index (VIX), where at a 12–13 handle markets appeared fearless despite mounting uncertainties.

Speed of Correction Surprising

I was surprised by the speed at which the markets corrected. This speaks volumes about forces that have underpinned this sell-off: the Federal Reserve (Fed) threatening to increase rates in September, a stronger U.S. dollar, weaker oil prices and collapsing global commodity prices. While cheaper commodities are a net positive for the U.S. economy, considering our commodity...


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