Dow Below 10000

News:
The Dow Jones industrial average slides to its first close below 10,000 in nearly four months. The European debt crisis, Koreans conflict, and potential China slowdown are the factors attributed to the recent market’s turbulence.

Thought:
After hitting numerous 52-weeks highs in the period of March to mid-April, the stock market has dropped more 10% that technically enters the “correction” territory. Now, the important question is whether it is a short-term correction or it is the start of a bigger slump. Based on the following analysis, the market seems like just experiencing a correction.

1. The US economy is still improving, especially for the employment and the consumption markets. Most of the American corporations reported blow-out earnings and revenues for the first quarter with very rosy outlook. In addition to that, the recent economic data are also very positive. Although the European woes will affect the export to the countries, the economic damage to the US is limited because US is not an export dependant country. The main engine of the economy here is consumption, which is accounted to about 70% of the national income. As the recent data suggest, the US is growing internally.

2. The European woes may help the US as a matter of fact. Fear of the debt crisis and the consequent economic fallout drive investors to put their money into the safe places. One of the safe places is American because it is a super power and its economy is growing. Recent data showed that countries such as China and Japan increased their holding in US Treasury. The recent turmoil also drives up the demand and prices of the US bonds, which in turn pushes down the interest rate. The 10 years US bond rate stands at 3.21% today that has dropped more that 0.6% in less than a month. The housing market will surely be a beneficial of it as well as the US government and the US companies. Additionally, the Federal Reserve will probably delay the interest rate hike in the uncertain time. The low rate will keep supporting the economy growth in the US.

3. The fear of global economy slowdown also depresses the raw material prices. For instance, the oil price has dropped more than $13 per barrel from the peak this year. Cheaper oil and cheaper materials will definitely help businesses and consumers.

In the opposite of the bright sides, there is a concern that the current debt crisis would depress business and consumer confidences. If banks stopped or made fewer loans and/or consumers stopped spending, it would spell a trouble for the US economy. However, given that the Fed and the central banks around the world had spent so much effort to flight the financial crisis in 2008-2009, the world economy had escaped another depression. They will not allow the world fall into the hole again and they are believed to put whatever efforts they can to keep the economies afloat. Two weeks ago, the European countries and the IMF swiftly put together a trillion dollars rescue package with a credit facility provided from the Fed. If the condition worsens, they will surely make other strong actions to help. On the other hand, the US banks are in much better situation today than two years ago after recapitalizing their balance sheets.

The Korean conflict will probably not develop into a bigger issue because most of the countries are condemning the action of the North Korean to the South Korean warship. The North is not financially and military strong enough to stand against the whole world.

The potential China slowdown contributed by the government tightening efforts will not affect the US economy much. As a matter of fact, the Chinese economy will still expand at a rapid pace, but not at an overheating level.

The market volatility may continue for a while. But, in the long term prospective, some of the stock prices are at an attractive level. It should be a good time to start accumulating beaten high quality stocks.