In the options market bets that the S&P 500 will correct 10% are now double those that the index will rise. That ratio had been in place for a month, the longest period since Bloomberg began to collect the data in 1995. The news service quotes one market observer: “People are starting to realize that in the second quarter we’re not going to have blowout earnings,” said Nick Raich, Cleveland-based director of research at National City. And, sentiment supporting that outlook is beginning to grow with some guessing that the market could fall as much as 20%.
It has been four years since the market dropped 10% but slow earnings and problems in the sub-prime market could converge to take prices down.
A drop in the market, in and of itself, might not do damage to the US economy, But, coupled with falling home prices and higher energy costs, a sharp fall in stock prices could make the mid and high-end consumer pull in on spending, taking the economy’s biggest engine out of play.
A "triple play" of that sort could send the economy into recession.
If the market is going to drop, it is likely to be between now and the end of earnings season, a month from now. And several large companies would probably have to put out disappointing numbers.
Despite rumors to the contrary, the market can’t go up for ever, and there are increasing signs that it could go down a lot.
Douglas A. McIntyre
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