The Two-Way
3:16 pm
Mon February 3, 2014

Stocks Head Lower; Investors Wonder What's Next

Originally published on Mon February 3, 2014 3:44 pm

If your New Year's resolution was, "I am going to prepare for retirement by moving my savings into stocks," then you must be very sad now.

Broncos-fan-level sad.

On Monday, the Dow Jones industrial average plunged an additional 326 points, down about 2 percent to 15,373. That was the seventh triple-digit drop so far this year. Back on Dec. 31, the Dow was at 16,577.

And the day was even worse for the S&P 500, which lopped off an additional 2.3 percent to slump to 1742. As recently as Jan. 15, that stock index was at 1848.38.

In other words, your stock portfolio has been getting killed so far this year. Experts have been tossing out lots of explanations. Among the ones cited often are:

  • Fund managers' decisions to sell shares to lock in profits after last year's big gains
  • Worries about slowing growth in emerging markets
  • Possible changes in the Federal Reserve's plans for interest rates
  • Weakening U.S. corporate profits
  • Slowing auto sales
  • Weaker-than-expected growth in manufacturing

So where do we go from here? Predictions are all over the place.

Some analysts think this is just a short-term pullback. They say the market is headed for a fairly typical "correction," a period when the market may drop 10 percent before investors start plowing money back in.

This slump could be seen as a "healthy" pullback, coming early in the year and allowing mutual funds to lock in profits from 2013's huge gains. Once stock prices are back down to lower, more attractive levels, the investors will come back, so the argument goes.

Optimists point out that both December and January were unusually cold, so that might have slowed auto sales, construction and retail sales. When the weather warms, the economy and the stock market will snap back, they believe.

But pessimists are worried. They fear interest rates will be heading higher, China will keep slowing and conditions will not be as favorable to corporate profits. Currency problems will keep hurting emerging markets and Europe will slow again, they argue.

Paul Edelstein, director of U.S. financial economics at IHS Global Insight, said the markets could be due for a correction with losses in the 5 to 10 percent range.

"Our view, however, is that economic fundamentals in the U.S. economy remain strong," Edelstein said. "This isn't yet the time to panic."

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