(Source: Associated Press/AP Online)
By DAVID K. RANDALL
NEW YORK - Just six weeks ago, the stock market hit its highest point in three years. Then came mounting evidence that the economic recovery may have stalled.
The Standard & Poor's 500 index has dropped 6.8 percent since April 29. Declining just as quickly: the hopes of many investors and economists for robust growth in the second half of the year. Industries likely to do well if growth is strong, such as financial, technology, and industrial, are already down 8 percent or more.
If the stock market drops 10 percent, it would signal a correction. Some market analysts, such as Citigroup's Tobias Levkovich, believe that the stock market is on that path now.
Corrections are common during bull markets, but one now could lead to more than the usual hand-wringing. That's because the Federal Reserve will end at the end of this month its program of buying Treasury bonds to support the economy by keeping interest rates low, which also makes stocks look attractive. The economy - and by extension, the stock market - will now need to show that it can expand without the Fed's help. What's more, the European financial crisis still isn't settled. Discussions about a second financial rescue package for Greece are two weeks away.
"No one rings a bell to let everyone know that we've hit a top or bottom (to the market)," says Nicolas Colas, the chief market strategist at ConvergEx Group, a technology and brokerage company in New York. And "no one knows how far this slide is going to go on for."
A drop of more than 20 percent would put an end to the bull market that started in March of 2009. The difference between a correction and a bear market, of course, is that a correction often presents a buying opportunity, and a bear brings prolonged pain. Corrections are fairly common during bull markets. There have been 18 of them in 12 bull market stretches since 1946, according to Standard & Poor's. They typically last four months and erase 14 percent of the stock market's value.
The reasons for a potential correction now are numerous. Thanks in part to high gasoline prices, the economy in the U.S. isn't growing as quickly as expected at the start of the year. Since the market's peak on April 29, more than 15 economic indicators, ranging from the number of new jobs added in May to how much consumers are spending at retailers, have been weaker than analysts had predicted. What's more, a scarcity of parts from Japan, which is in the midst of a recession after its tsunami and nuclear disaster, has also hurt U.S.