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McClatchy-Tribune  08/04/2014 5:03 AM ET
Detroit Free Press Susan Tompor column [Detroit Free Press :: ]

Aug. 04--Are investors looking at a buying opportunity here after the latest pullback in the stock market? Or are we looking at the beginning of that long-promised correction?

Last week, the Dow Jones Industrial Average had its worst day since April. The Dow lost 317.06 points, down 1.88%, to close at 16,563.30 points on Thursday. On Friday, the Dow lost nearly an additional 70 points and closed at 16,493.37.

Bill Stone, chief investment officer at PNC Wealth Management in Philadelphia, said it is hard to find one smoking gun for the declines. Instead, a number of issues could be making investors edgy.

Market watchers point to various sources of unrest:

-- Russia is being hit by economic sanctions by the U.S. and the European Union.

-- Argentina's default on its currency, the country's second default in 13 years, put the health of some other foreign markets into question.

Raising rates?

The U.S. central bank may be closer than expected to making a move to raise rates. And at the very least, the outlook for interest rates has become far less clear.

Economists had earlier targeted rates to go up around the middle of 2015 or later. But there's more buzz about higher rates on CNBC and elsewhere.

The good news is that the U.S. gross domestic product -- the output of goods and services -- grew at a 4% annual rate in the second quarter. It was far stronger than the 3% forecast earlier by many economists.

Granted, some of those gains might be because the winter was so brutal and spending was sluggish.

The U.S. economy is showing solid job growth across a variety of industries, including construction, manufacturing and financial services.

But July job growth wasn't so robust that it would put additional pressure on the Federal Reserve to raise rates quickly, according to Robert Dye, chief economist for Comerica Bank.?

Others, though, wonder if a stronger economy might drive the Federal Reserve to act more quickly when it comes to raising rates, and stocks could readjust based on a new outlook.

Correction territory

Wall Street has had a long ride before a correction, and there's some thought that stocks are too pricey. The Standard & Poor's 500 has gone since 2011 without a 10% correction -- far longer than normal.

This is not, of course, how July started out. The Dow closed at a record 17,068.26 points on July 3 and kept heading higher. The Dow closed at a record 17,138.30 points on July 16.

Now all those July gains are gone and packed away with the red-white-and-blue tableware for Fourth of July festivities.

Investors overall may still be seeing some gains for 2014. On average, U.S. stock funds were up 2.11% through July 31, according to Morningstar. But that's down from average gains of 20.31% for the same time last year.

Fear is building even despite a string of solid second-quarter earnings reports so far this season.

Some market watchers say the unknown timing of when higher interest rates could hit -- coupled with the increased worry about geopolitical unrest -- could put Wall Street on edge for the rest of the summer.

David Sowerby, a Bloomfield Hills-based portfolio manager for Loomis Sayles, said the sell-off in late July could be the start of a long-overdue 10% correction. But he said such a correction would be part of a normal pullback and not likely a signal of a deep bear market ahead, which would involve losses of 20% or more.

"The critical factors I watch are not suggesting a decline of that magnitude," Sowerby said.

While many market watchers say they continue to be optimistic longer term, they admit it's hard for most everyday investors to overlook such a decline as we saw Thursday and Friday.

"It absolutely rivets people's attention," said Robert Bilkie, president of Sigma Investment Counselors in Southfield.

Contact Susan Tompor: stompor@freepress.com or 313-222-8876

 

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