Reasons For A Market Correction

by: Harold Fredrick

There are at least a dozen good reasons as to why the market is heading into correction:

  • GDP growth has been dangerously close to 0 all year long (or has possibly been below 0).
  • We are experiencing a return to deflation in the housing market.
  • The eurozone is facing a banking crisis similar to what the US saw in 2008.
  • There will be no immediate QE3.
  • Median duration of unemployment continues to grow rapidly, now testing the 50-week mark.
  • Approximately 4 million unemployed will have exhausted their benefits by the end of the year.
  • Inflation is becoming increasingly problematic for American small businesses and consumers, and in China.
  • The nation’s largest bank is facing solvency issues.
  • Funds from Obama’s first stimulus package are running out.
  • The economic benefits of a new Obama stimulus package wouldn’t be felt in the immediate future.
  • There is little likelihood that the Republican-controlled House will pass a stimulus package of any significance.

Those reasons should be sufficient to convince even the most stubborn perma-bulls that the market has nowhere to go but south. However, if doubters remain, look at the following 65-year historical chart of growth of the Dow Jones Industrial Average as compared to growth of GDP:

[Click to enlarge]

From the end of WWII until 1995, the slope of the Dow growth line approximated the slope of the GDP growth line. While one would expect slightly more deviation between the two lines as time passes from the baseline year, one would not expect the wild volatility in slope the Dow line has exhibited since 1995. The reasons for this volatility are debatable, but they aren’t important to the scope of this short piece. What is important is that we are currently on what appears to be a downward slope from our most recent peak (see the fallout from August). This pattern suggests that the most recent bubble we have been riding has begun to burst.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.