Just like the little kid who always blamed everyone for his woes while he was the one making the trouble…
This past week saw about $2 trillion in stock market value disappear with the Dow Jones Industrials losing, 4.2%… its biggest weekly drop since the spring of 2003. The S&P 500 faired worse, falling almost five percent.
The media was quick to give us a laundry list of reasons why the market was tumbling. It started with blaming Cadbury Schweppes plc. The company delayed an acquisition, as it had problems floating a debt issue. The blame then went on to other companies that might have problems for takeovers they’ve recently announced.
Any way you look at, the fact is the market is correcting from an extended rally. Two things can happen here: the market, which was due for a correction anyway, could be in the midst of a natural correction from a rally that would actually be healthy for it; or, on the other front, the big bad bear may have stepped in it for good.
Despite which camp you and I may fall into in respect to the next move for the markets, the truth is there exists far too much liquidity in the system chasing too few deals. Interest rates around the world, except for in America, are rising.
Is the market smelling higher interest rates ahead in the U.S.? Maybe. Is the market sensing the housing market will take a bigger bite out of the economy than Wall Street told us? Yes, I believe so.
Either way — correction or permanent bear market takeover — it’s almost impossible to make money from big-cap stocks when they are selling at 20 times earnings and paying hardly any dividend. Truth be told, I’d avoid the market until valuations become more reasonable.