Investor anxiety surges as stock markets relapse
NEW YORK -- The stock market, which hit stall mode at the start of June after a giddy eight-week run, is now in full-fledged slump mode.
The recent pullback, which has sliced 5.6% off the Standard & Poor's 500 index since its June 12 recovery high, has etched fresh worry lines into the faces of Wall Street traders, many of whom are starting to whisper the dreaded "C" word: correction.
The drop is the biggest for stocks since the March 9 bear-market bottom. Investors who drove the market up 40% after the March low on hopes the 18-month-old recession was loosening its grip are rethinking their bullish outlook amid signs the recovery will be less robust than anticipated.
"The market," says hedge fund manager Patrick Adams of Choice funds, "is coming to realize that the economic news is better but not good."
That fear was reinforced Monday when the World Bank cut its outlook for global growth to negative 2.9%, from -1.7%.
After watching in horror as the S&P 500 lost 57% of its value in the bear market, it's no wonder investors are feeling anxious at any sign of a relapse.
"What was surprising was the market's quick 40% rise off the low, which was unsustainable," says Matthew Kaufler, manager of the Federated Clover Value fund. "What isn't surprising is if the market suffers a pullback. If this isn't the correction, I'm pretty confident we will get one over the next three or four months. It's just a question of severity."
Fear of a correction — a drop of 10% or more — is magnified by the fact that the market has gone virtually straight up since early March (105 correction-free calendar days, in fact, vs. a correction on average every 320 days since 1928, says Ned Davis Research).
Prior to the current slide, the biggest drop the S&P 500 suffered since its bear-market low was a 5.4% drop in late March. After Monday's 3.1% plunge to 893.04, the index is back in the red for 2009, down 1.1%. Profit taking by investors trying to lock in big gains in the second quarter is fueling some selling.
