Dow Drops 376.36!

Yesterday, the DJIA had a major drop in value, as did all of the other exchanges. I generally like to use the S&P 500 as the base for reviewing market activity. Yesterday it was down the most of all the exchanges, with a 3.9% drop to 1071.59. What is interesting is that the S&P 500 has dropped from its peak, on April 23, about 12%. What does all of this mean? For the short run it likely means the markets will move up for the next 2 to 7 days as that is what generally happens after a 90+% down day for stocks. Because the volume yesterday on the NYSE was 8.5 billion and the market moved down dramatically it means there was an ample supply of sellers who were likely doing some profit taking. It also means the market, at some future time, will test these lows. Given all of this data what does it mean long term? First of all, I believe this is the correction that I've been anticipating since the middle of March as the market was becoming overbought. I don't think this is a return to a Bear market. By mid April it was very apparent to anyone with an understanding of the market that it was overbought and a correction was coming sooner or later. The actual reason for the correction generally is meaningless in my opinion. In the early part of yesterday the drop was being blamed on the falling euro but the euro climbed from 1.21 to 1.25 so that was not it. Then it was the job data that came out showing new layoffs of over 470,000 instead of the 440,000 that was anticipated. Good story, but I don't think it holds long-term weight since the new job creation in April was 290,000 while what was anticipated was 180,000. Earnings data for corporations look good, consumer spending is OK and inflation does not seem to be an issue. The stock market is a leading indicator. This blip downward would indicate that the rosy picture that Wall Street saw in mid-March is being reevaluated. While the economy is improving it will take some time before it is sound again. In 1990, when we had a recession, the big reason was the failing productivity level in the US. It took the US five years to get back on top of worldwide productivity but it did what was necessary. The darkest cloud over the US currently is the government’s interference with the entrepreneurial spirit of this country. There are over 25 million small businesses in America and they are the heart of the economy. They have to have confidence in the economy, government spending and legislation in order to be willing to expand. Some of the new legislation intended for large corporations is falling on the small businesses both in regulation and more so in taxes proposed in the new tax bill. If this continues it could stall the economy and change the direction of the stock market. Ed Mallon