Market leaves investors with a sinking feeling

John W. Schoen • Profile • E-mail

After recently hitting a string of record highs, stock markets around the world are in retreat — with the Dow Jones industrial average shedding 400 points Tuesday after a global sell-off that started in China.

That leaves investors with a tough choice. Is this a brief stumble in an otherwise strong, global stock market? Or is the recent pullback the beginning of a nastier slide?

The immediate cause of China’s stock meltdown appeared to be talk of a capital gains tax there to slow a wave of speculation that has sparked a market surge reminiscent of the U.S. bubble in the late 1990s. Stock prices on the Shanghai exchange have roughly doubled in six months, including a 15 percent run in the two weeks leading up to Tuesday's big sell-off. In that context, Tuesday's 9 percent pullback in Shanghai seems relatively tame.

But with U.S. markets posting stomach-churning drops, some observers say U.S. stocks also have been due for a breather. The broad Standard & Poor’s 500 index was up nearly 20 percent since mid-2006 before beginning to fade last week.

“The S&P 500 has had eight consecutive monthly increases without any significant corrections,” said Alexander Paris at Barrington Research in a note to clients on Monday. “And there are a lot of nervous paper profits to be taken if sentiment is indeed changing.”

The casual observer can be forgiven for missing that change in sentiment. In fact, there are still plenty of professional investors who insist that nothing has changed to make stocks worth substantially less than they were Monday.

Companies have been reporting fairly solid profits, interest rates and inflation are still relatively tame, oil prices have backed off their highs, and the U.S. economy posted a healthy 3.5 percent gain in the fourth quarter despite a major pullback in the housing and auto markets last year.

Some analysts say you should look at the recent pullback like a markdown at the mall: It’s time to go shopping. Bulls like Anthony Dwyer, a strategist at FTN Midwest Securities, figure that though there may be “a couple of nasty weeks ahead” there is not enough bad news to signal a longer-term market retreat.

“The macroeconomic environment doesn't change overnight,” he said. “So we're dropping from a near 52-week high, (but) things are still pretty good.”

The question overhanging the market pullback is whether those good times will continue to roll. Former Fed Chairman Alan Greenspan cast some doubt on the economic outlook Monday when he told a business conference that after uninterrupted growth since 2001, he now sees signs of a looming recession.

“When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign," Greenspan said.

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