Market Risk

[dan_s]

Market corrections are to be expected and they are healthy (but still painful). Hard to understand why the Sweet 16 is down so much this week with oil over $100/bbl.

From Steven Leeb's Income Preformance Letter:
This week marks the second anniversary of the current bull market in stocks that began as a rebound from 12-year lows. The stock-market surge's accurate message was that the U.S. economy would rebound from the worst recession and bear market since the Great Depression.

At its peak almost three weeks ago, the Standard & Poor's 500 had more than doubled from its March 2009 lows. Since then, the S&P 500 has dropped about 3.6%. That's not much considering that a pullback has been long overdue. But the risk of further declines is considerable.

At first, stocks weakened because of soaring oil prices and concerns about inflation. But this week, stocks have been weak despite an oil-price retreat amid renewed concerns about growth. Today, the Dow Jones Industrial Average, the Standard & Poor's 500 and the Nasdaq Composite all fell through their 50-day moving averages for the first time since last summer. The Dow closed down 228 points, its biggest decline since October.

Today, there was bad news on several fronts. In the U.S., the Labor Dept. reported that initial claims for unemployment benefits unexpectedly rose for the week ended March 5, and it revised higher the previous week's favorable numbers. And the Commerce Dept. said that the U.S. trade deficit hit a seven-month high.

In addition, worries about European sovereign debt moved into the foreground again as Moody's downgraded Spain's government debt. And China reported that growth of its exports fell to the lowest pace since 2009 in February. Meanwhile, political upheaval continues in the Middle East and North Africa. The conflict in Libya now looks like it will last a while, and new protests are scheduled for tomorrow in other countries, including Saudi Arabia and Iraq, which are both major oil producers. Today, there were reports of Saudi police firing on protestors.

Last year, the S&P 500 fell 16% in 2-1/2 months starting in late April because of worries over a slowdown in the U.S. economy, a European sovereign debt crisis and monetary tightening in China. This time, Middle East turmoil has joined the list, while the U.S. economy seems to be on stronger ground than it was last spring.

But in 2008, soaring oil prices cut into consumer spending and business profit margins, dampening economic growth, which led in turn to falling oil prices. (Of course, the financial crisis was the dominant issue.) A risk here is that an oil-price shock again will hurt the economy.