Portugal: An Unusual Suspect for a Market Correction

European credit concerns are serious business, but talk of a 10% market pullback is premature

Fear over the health of a major Portuguese lender sent stocks reeling Thursday, as investors scurried for the safety of gold and Treasurys amid wider European credit concerns.

ukraine portugalOr at least that’s what we’re all telling ourselves.

In reality, no one knows why the market does anything over periods of time as short as a single session, much less a week, a month or even a year.

True, still-shaky balance sheets on the periphery of the eurozone are a big problem. But it doesn’t automatically follow that a missed coupon payment from a single Portuguese lender should spark a global selloff.

After all, stocks have held up better on worse news in the past.

There’s always more at work to such violent market moves, but since it’s impossible to know what they are — especially in real time — the simplest story usually sticks.

Right or wrong, the market needs a narrative, and the flare-up in Portugal fits the bill.

Never mind that Thursday could have broken the other way. After all, the session also served up some seriously good news. Had the market woken up on the other side of the bed, the narrative might have been something like: “Stocks shrug off European woes, rise on labor market strength.” (Weekly jobless claims came in near a seven-year low.)

Portugal: Has the Correction Begun?

What’s really going on is that everyone knows the market is long overdue for a correction, and it’s got to start somehow. So maybe Portugal is Mrs. O’Leary’s cow.

We know a correction is coming because markets never move in a straight line. The S&P 500 was up 30% last year. Halfway through 2014, it was on pace for another 12% gain this year. Technically, anecdotally, historically, stocks are just begging for pullback of at least 10%.

As Barry Ritholtz writes:

“It’s been more than 1,000 days since the Standard & Poor’s 500 Index had a decline of that [10%] magnitude. We have simply been due, and delinquencies at Portuguese banks are a handy excuse for wringing out some excesses that have built up over that period.”

The thing about corrections — as Ritholtz himself says — is that they are impossible to predict. Of course a correction is coming. But that doesn’t mean Portugal — as good an excuse as it may be — will be the pebble that sets it rolling.

Yes, European credit concerns could metastasize and drag the market into its much-needed pullback. But it’s just as easy to imagine a scenario where a beat-and-raise Q2 earnings season sends the market to even more record highs.

The bottom line is that no one knows if Thursday’s selloff is a short-term setback or the start of something bigger.

If there is a certainty, it’s that the worst thing you can do is blindly join in any panic selling.

Article printed from InvestorPlace Media, https://investorplace.com/2014/07/portugal-stock-market-correction/.

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