Despite sharp selloff, too early to worry about a correction

Fri Aug 1, 2014 5:18pm EDT
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By Angela Moon

NEW YORK (Reuters) - Wall Street's worst week in two years was enough to get investors worried about whether a long-overdue correction is coming, but analysts are still leaning bullish.

The S&P 500 ended the week down 2.7 percent, its biggest weekly loss since June 2012, a decline that had followed several weeks of selling.

The market is undoubtedly ripe for a correction - the current rally has continued for nearly three years without a decline of more than 10 percent. The Fed looks closer to raising rates, and housing and auto sales figures suggest those markets may be softening, if only temporarily.

"The summer has been just tough because there has been very little to buy," said Kathleen Gaffney, portfolio manager of the Eaton Vance Bond Fund. "But I think what is happening is we are seeing the markets adjusting from an environment of lower interest rates to higher interest rates – and that's producing volatility."

The Federal Reserve's monetary policy has been favorable for the markets, and though the Fed is expected to begin raising rates next year, the absence of wage pressures has kept moves in Treasuries yields relatively muted.

While the spread between long- and short-dated Treasuries has narrowed of late, which tends to happen as the economy slows, the difference between the two-year and 10-year Treasury notes is more than 2 percentage points - still a favorable sign for economic growth.

On Wednesday, the Federal Reserve gave a rosier assessment of the U.S. economy while reaffirming that it is in no hurry to raise interest rates. The U.S. central bank also, as expected, reduced its monthly asset purchases to $25 billion from $35 billion.

Although government data on Friday showed U.S. job growth slowed in July and the unemployment rate unexpectedly rose, recent economic data has been largely positive with growth in second-quarter gross domestic product at 4 percent and favorable revisions to first-quarter GDP.   Continued...

A Wall Street sign is pictured in the rain outside the New York Stock Exchange in New York June 9, 2014.     REUTERS/Carlo Allegri/Files