Markets in a Nutshell
May 24, 2010 Issue
Tough week for the stock market. The Dow dropped 4.0%, the S&P 500 4.2% and the Nasdaq 5.0%. The down returns last week dropped the indexes into negative territory for the year (Dow down 2.3%, S&P 2.5%, Nasdaq 1.8%). The losses last week officially puts the market in “correction” territory (a drop of 10% or more from a high level) for the first time since the manic bull market (up 80% in 12 months) began in March 2009. It was long overdue and believe it or not is actually healthy for the long term growth of the stock market. When stocks go up without corrections, it usually leads to over optimism and overvalued stocks.
Congress is putting the finishing touches on a major financial reform bill (passed by the House on Thursday) which will carry the most sweeping changes since the Great Depression of the 1930’s. As always, there are “good” and “bad” elements with the reform. One good is that there will be less ability for banks and other financial institutions to put the financial system at risk of collapse. The bad of course is that more govt. regulation will likely slow potential growth and innovation in the financial sector (for now). But alas, this is the tug of war that goes on between free markets and the inherent volatility and the desire for stability.
Wouldn’t you know it. Just as the “little guy” get back into stocks, stocks sell off and go down. The Investment Company Institute reported that $28 billion of net new money was deposited in stock funds during the first quarter (vs. a $41 billion outflow during 1st quarter 2009). It is estimated an additional $14 billion went into stock funds in April. While not always exact, most often when the average investor is piling into an asset class (stocks, bonds, gold oil, tech stocks) it is a good indicator that the asset class is getting overvalued and will fall in price.
There are many who believe the current market correction is just that, a correction that will end soon and then the bull market will resume. Bloomberg News quotes Jeff Rubin, director of research at Birinyi Associates, as saying that all bull markets have corrections but the positive outlook still remains for the year with their prediction of a 17% rise in the S&P 500 for 2010. First Citizens Eric Teal also sees a rise in 2010 although predicting a lower number (10%) than Birinyi.