A Stock-Market Pullback: Is the Recovery Stalling?

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Richard Drew / AP

Traders work on the floor of the New York Stock Exchange

Faced with troubling signs of a stalling recovery, investors sent the U.S. stock market down sharply on June 15. At the day's close, the Standard & Poor's 500 Index was off 2.4%, with the steepest drops suffered by major banks and commodity producers. Bank of America, the most actively traded stock during the day, saw its price shed nearly 2.8%. The Dow fell 2.1% to close at 8612.

After a 40% rally in the S&P 500 off its March market lows, Wall Street strategists had been expecting a market pullback, or consolidation, as part of an orderly advance. But investors are also increasingly anxious that stocks have risen too far and too fast relative to prospective earnings. Even after the decline on June 16, stocks still sell at more than 20 times their expected earnings for 2009 — far from cheap.

Uncertainty about the economic recovery was also reflected in commodity markets, which sold off broadly on June 15. China is believed to be stockpiling a range of raw materials, notably copper, which has driven prices dramatically higher in recent months. But ubiquitous weakness in global demand is now taking a toll. The Reuters-Jeffries CRB commodity index fell 2.25% during the day. Gold prices dipped slightly, down $11 per ounce, but stocks of precious-metals companies were hammered, declining more than 7% on average.

The downdraft on June 15 in stock prices was more than a result of lackluster buying. Traders were lightening portfolios as signs of continued economic weakness trumped talk of green shoots and recovery. As David Rosenberg of money manager Gluskin Sheff noted in a Monday-morning report, year-over-year economic numbers are simply awful: raw-steel production (-47.3%); lumber production (-32.6%); railway traffic (-20.1%); electrical output (-12.9%). Such negative numbers, in Rosenberg's view, "hardly paint the picture of an imminent recovery."

The market mood on June 15 was further darkened by newly released data from the Federal Reserve Bank of New York. The bank's Empire State Manufacturing Survey showed a sharp decline for May, reflecting further weakness in new orders. That news came on the heels of grim tidings from the head of the International Monetary Fund, which noted on June 15 that the worst phase of the global recession may be yet to come.

Despite June 15th's market weakness, investment managers are optimistic that stocks will not head back to their March lows, since the scariest part of the financial crisis appears to be over. That said, most do anticipate an ongoing correction that might take stock prices down another 10%.