We’re Already Experiencing a Stock Market Correction

The Dow Jones Industrial Average (DJIA) may have rebounded, posting a record-breaking session on Wall Street, but how long can stocks maintain this pace? It seems not long at all. Stocks reversed the bullish streak seen on March 26. The glimpse of optimism, resulting from the announcement that Washington and Beijing have started to talk again, has not been able to mask the fact that a stock market correction is already happening. The bull appears to have ended its run, and the bear is knocking.

The Dow Jones managed to reverse the bearish winds that have been hovering for some time. Investors seem eager to find and hang on to any piece of good news. They know that the risks to the U.S. economy go beyond the latest problem.

Investors all over the world had sensed, perhaps even at the height of the bull run that culminated last January, that a stock market correction was due. The optimism that drove the DJIA to a few hundred points shy of 27,000 may have been misplaced after all.

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What Drives Markets Up or Down Is Not Often Clear

The factors affecting the markets, up or down, aren’t always clear. Econometricians and financial analysts try to use fancy formulas to predict behavior. But, that’s the problem. They always have to “assume” this or that variable. Market sentiment is far more psychological and intractable than to lend itself to easy predictions. Nevertheless, investors detected a favorable turn when Washington and Beijing announced that they would possibly re-engage over trade talks. (Source: “Dow Gains 669 Points Amid Reported Trade Talks With China,” NPR, March 26, 2018.)

Note, the operative term is “reported trade talks.” They haven’t happened yet. And President Donald Trump’s tariff threats from the previous week against China stand. The oil price, which has often been a better indicator of investors’ long-term sentiment and degree of risk aversion, tells a different tale than the Dow. Even after a slight dip, oil remains above $65.00 a barrel, which is the highest price in recent years.