Tags: tom | hutchinson | economy | us | pullback

The Correction That Isn't

Monday, 20 Jun 2011 08:50 AM

By Tom Hutchinson

If the time was ever ripe for the stock market to take a beating — it's now.

After having run up more than 100 percent since 2009 and in spite of an unholy avalanche of recent terrible economic news, the S&P 500 has fallen a measly 7.2 percent from the post financial crisis highs – not even an official correction.

To a casual observer, the market may appear to be plummeting. The S&P 500 posted six straight weeks of losses (until this past week). But, the actual fall in value has been quite modest. While the market could fall more, it has already shown surprising strength after absorbing the news that's out there already.

Just the fact that the S&P 500 had run up 100 percent since March 2009 makes a 10 percent or better correction quite reasonable and natural — regardless of the state of the economy. But the economy stinks out loud.

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Here are some recent tidbits that reveal a worsening economy.

• Employment numbers have reversed course and are getting worse;

• 1.8 percent first-quarter GDP was well below expectations;

• Growth projections have been scaled back for the rest of the year;

• Housing prices hit new post bubble lows (a double dip);

• Emerging market economies and the world economy is losing steam;

• QE2 end this month and the liquidity pump will shut down;

• Consumer confidence index is lower than right after 9/11;

• Almost all the economic numbers for May were worse than expected.

In case this news isn't bad enough, a major crisis is potentially looming.

The European debt crisis is a ticking time bomb that could blow up at any time. Upheaval in the Mideast continues with the ultimate affects of the Arab Spring unknown and ominous. The debt ceiling deadline is fast approaching and the two sides are so far apart they probably can't agree on what to order for lunch.

But these are just short-term problems. The long-term picture looks far worse.

It remains highly questionable whether the government will do anything about the out-of-control debt that promises to destroy the U.S. economy if not fixed.

As of now, we have a president who is utterly clueless and in a million miles over his head in terms of the economy. Unless high speed trains will somehow solve all these problems, this guy is part of the problem, not the solution.

That's the bad news.

The good news is that the huge recent gains don't appear fragile as they have held up quite well through a storm. If things get better, or at least stop continuing to get worse, the market could easily forge ahead to new post financial crisis highs. The recent pullback presents a buying opportunity.

But, why is the market so resilient?

The answer is simple. Money has no place else to go. The 10-year Treasury yield of about 3 percent is at the low point for 2011 and investment grade bonds are only paying 5.7 percent.

Overseas markets have been mostly falling. And, commodity prices continue to plunge.

The market should remain strong unless and until interest rates start to rise – causing disintermediation into fixed rate investments. But, we still may be a ways from that. The other thing that could bring markets down is a panic of some sort resulting from one of the aforementioned looming threats or something else.

In the absence of rising rates or crisis panic, the stock market should continue to be a good place to be. While the easy money is probably gone, successful stock pickers can profit and strong dividend-paying stocks should continue to hold up well.

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