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An Overdue Market Correction

March 7, 2012 3 minute Read by John Prestbo

The stock market correction seems to be underway. The excuse, thank goodness, is “concern over global economic growth,” rather than something truly terrible. The trigger for the Dow Jones Industrial Average’s retreat from its one day of closing above 13000 appears to be China’s lowering of its 2012 growth target to 7.5% from 8%, which has been the official goal since 2005. It is basically a meaningless action — “symbolic” is the adjective one kind reporter used — but it has had the effect of shouting “boo!” in a dark alley. China’s export machine is faced with economic slumps, if not outright recessions, in Europe and Japan, and until recently slow growth in the United States. The last thing China wants is to take even a remote chance of coming in under target, so it moved the goal posts instead. While pundits busily proclaim that China is willing to settle for slower growth, nothing could be further from the truth. Forecasts for Chinese economic growth this year range from 8.2% to 8.5%. And that 8% target of yore? China has grown an average of 10.9% annually over the past seven years. China will not so casually relax its position as the world’s economic growth dynamo. With a change in leadership approaching, what better way to showcase the People’s Republic than to once again blast through its growth target? Still, investors needed some reason to cash in, and a market correction is a bit overdue. The Dow Jones U.S. Total Stock Market Index — which includes every exchange-listed stock — climbed 26% in five months from October 3, 2011, through last Friday, March 2. This was accomplished in a fairly steady march amid an increasing number of signs that the U.S. economy was shaking off its doldrums. It’s time for the market to find a new base and begin rebuilding from there.


Author

John Prestbo
John Prestbo

2012 Economic Growth Fellow

John Prestbo is retired as editor and executive director of Dow Jones Indexes. Previously he was markets editor at The Wall Street Journal. He has co-authored or edited several books over the past 30 years. The most recent is “The Market’s Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average,” published in 1999 by Dow Jones Indexes. His column, Indexed Investor, appears on the highly regarded “MarketWatch” business and finance website. He received his bachelor's and master's degrees from Northwestern University.

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