Stocks Are Tumbling, But It's Too Early to Yell Correction

With the Dow Jones Industrial Average facing a second day of triple-digit losses and likely headed for its worst week in eight months, a lot of people are asking whether this is the correction many had anticipated once the Federal Reserve began scaling back its easy-money policies.

Maybe, but it’s too early to tell.

The escalating troubles in emerging markets and a string of mediocre U.S. earnings reports are the immediate causes of the selloff, analysts said. It remains to be seen whether these are temporary blips or if they will act as a catalyst for a sustained downturn.

Peter Cardillo, chief market economist at Rockwell Global Capital, is leaning toward the former. “We’re being held hostage to the chaos that’s occurring in emerging markets,” he said.

Another market analyst was less certain and less optimistic, telling “the pieces are in place for a correction.”

Although he stopped well short of saying a correction was unfolding, the analyst who requested anonymity said the Fed’s announcement last month that it would begin dialing back its stimulus programs has forced investors to confront realities they had been largely ignoring.

“There were similar issues in 2013 but no one cared” because the Fed was pumping billions of dollars into the economy each month through its bond purchases, or quantitative easing program, the analyst said.

In mid-day trading Friday, the Dow was down 200 points, or 1.24%, and has fallen 2.3% for the week. The S&P 500 fell 20.7 points, or 1.1%, to 1808 and is down 1.2% for the week.

Issues Abroad Ricochet to U.S. Markets

Emerging-market currencies erupted in turmoil on Thursday as Argentina devalued its currency, sending ripples around the globe. The Turkish lira and the South African rand both plunged. Compounding the currency issues was a report that manufacturing in China may be slowing, adding to growing concerns that growth in the world's No. 2 economy may be losing momentum.

Ho hum fourth-quarter earnings so far have also left investors skittish. While most companies are beating Wall Street’s expectations for profits, a number – consumer products giant Johnson & Johnson (NYSE: JNJ), for example -- have issued less-than-optimistic forecasts for the rest of the year.

Cardillo said earnings have been “not all that bad and not all that good.”

For months, ever since the Fed began hinting last spring that the time was nearing to begin dialing back its easy-money stimulus programs, analysts have predicted stocks might see a reversal away from the relentless upward trend of the past four years.

Consider that the S&P 500 hasn’t suffered a 10% correction since 2011 and has gone 148 days without a 5% drop, according to Strategas Research Partners.

All these tremors are leading investors to safe havens such as U.S. government bonds. The yield on the benchmark 10-year Treasury note, which moves in the opposite direction of price, fell to 2.74% Friday, following a steep drop Thursday. The yield on the 10-year note, which ended 2013 at 3.03% and which Wall Street expected to rise this year, is now at its lowest level since late November.

Cardillo said time will ultimately tell, but if markets don’t drop precipitously lower as the emerging-market issues are resolved, the current decline should be “short-lived.”

“I don’t believe this is the beginning of the correction that everyone is talking about,” he said.