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March 04, 2007

The Market Correction

Last week, on Tuesday, we saw one of the largest single day point drop on the Dow Jones Industrial average since the terrorist attacks of Sept. 11, 2001. This followed a 9% sell off on an important Shanghai index, and subsequent sell offs on other Asian and European markets. The Nasdaq and S&P 500 indicies also suffered major losses. 496 out of the 500 S&P stocks were down on Tuesday. Much of this drop took place in a matter of a few seconds due to trading problems at the New York Stock Exchange.

Many think that this is the first step in a larger market correction that we may have been overdue for. The VIX, a market volatility indicator, increased over 60% on that Tuesday and increased an additional 16% on Friday. This indicates a great deal of uncertainty in the market. This currently appears to be a market isolated occurrence rather than an indication of major underlying economic problems. While growth is expected to moderate and a recession is a possibility, it is unlikely that this market drop is an indicator or even a result of this. It is much more likely that the correction is due to unusually high valuations in the market. Only time will tell how far this correction will go.

Posted by jkill at March 4, 2007 02:18 PM

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