There are renewed worries over whether the U.S. economy has hit a soft patch given new data showing employment has slowed sharply, housing weakness has persisted, and the retail environment is choppy at best. On Wednesday we also saw inflation figures that were worse than expected. So in the face of the weak spots, we have a new concern about inflation being the next upset down the road because of all of the liquidity and easy money out there.
A spiraling debt crisis in Europe is unnerving some areas of the market as well. Europe is very slow, and a broad-based restructuring of debt is needed in several countries, such as Greece, and possibly Portugal – among other trouble spots there.
Add to that a few worrisome catalysts on the horizon: The Fed will end its quantitative easing program on June 30th. Many expect a market selloff when this goes away because the biggest buyer of Treasurys will go away, and that could push rates up, bond prices down and cause money to come out of equities in search of yield. We are also watching with one eye the August and September deadlines for the debt ceiling. The uncertainty of whether it will be raised is not good.
Finally, one of the biggest drivers of global growth for several years now has been China. The country’s 10 percent GDP and its growing population of 1.5 billion people have created demand and spikes for everything from commodities to goods. Now China is also slowing down. Jim O’Neill, chairman of Goldman Sachs Asset Management, and the man who came up with the acronym ‘BRICS’ to refer to the economically related nations of Brazil, Russia, India, China and now South Africa, told me last week that he is expecting China’s growth to slow to 7 percent.
That's a big move. And if we see a sharp and abrupt slowdown there – a so-called hard landing – it will have reverberations everywhere. The question is how much of this is priced into the current market. The market has been down for 6 straight weeks, so one would expect some of the above to be known. But it doesn't feel like investors are done selling yet ahead of these unknowns.
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