After closing in on its all-time high, the Dow industrials suffered a strong sell-off yesterday. The sell-off is continuing today. In fact, all major indexes are down. As is often the case, the greatest degree of selling is occurring in stocks that had the strongest gains in recent periods.
As I've been saying for some time in the Forbes Growth Investor (and on this blog), I see no reason for stocks to continue rallying. Why buy stocks when interest rates are rising, the housing boom is finished, and energy prices remain stubbornly high? Furthermore, thanks to the Fed, you can even get a decent return on cash.
As we saw in yesterday's retail sales figures, higher gasoline prices are indeed leaving consumers less money to spend on other things. Yet, today's Wall Street Journal seemed to bend over backwards to present the retail data in a favorable light.
Investors often confuse the economy with the stock market. I expect the economy to continue displaying decent growth. The problem is that growth is likely to slow to 2-3%. This isn't bad, but it is well below most economists' expectations. The stock market, on the other hand, is likely to see further weakness. With growth slowing, why jump into stocks right now? As I advised in my April 13 entry, investors should seriously consider allocating less to equities and more to cash.