Stocks fell in May, June and July. August is off to an ugly start as well. The S&P 500 is now slightly in the red for the year following a huge sell-off Tuesday.
How bad is this mini-crash? The Dow suffered its eighth consecutive loss Tuesday. The last time the blue chip index fell on nine straight days was in February ... 1978!
With so many worries about the economy rapidly losing steam, is this the beginning of a market correction? Could stocks even finish 2011 in negative territory?
That is looking increasingly possible.
Stocks surged dramatically from the bear market lows of March 2009 largely on the belief that the worst in the economy was over.
And while few expect another Great Recession -- especially now that the debt ceiling deal has removed the risk of the U.S. defaulting -- it's fair to wonder if the rally was too fast too soon. Keep in mind that the S&P 500 doubled in just two years.
"When you have a bull market, you want to give it the benefit of the doubt. They usually go on longer and rise further than you expect," said Barry Ritholtz, CEO of Fusion IQ, a New York-based research firm. "But during the past three months, it's becoming clear that the economic data is getting softer and softer."
The economy isn't substantially better now than it was two and a half years ago. The unemployment rate is still above 9%. Consumers are starting to spend less and save more. That doesn't bode well for corporate sales growth.
Lance Roberts, CEO of Streettalk Advisors, an investment management firm in Houston, said he thinks it's 50-50 whether stocks finish 2011 with gains at this point. Simply put, earnings can't continue to impress investors if the economy remains stagnant.
"The economy drives profits. Earnings have been decent but a lot has been due to cost cutting. Without sales growth, profit margins may be at their peak," Roberts said.
That's not encouraging. While valuations may not be insanely crazy like they were in the height of the dot-com era of the late 1990s, stocks aren't dirt cheap. The S&P 500 is valued at 13 times 2011 earnings estimates.
That's reasonable considering that earnings are expected to increase by about 10% this year and in 2012. But if profits miss forecasts in the next two quarters, it's tougher to justify current valuations. And would it really be a surprise if earnings disappoint?
A much weaker-than-expected report on manufacturing activity in July spooked investors Monday. Until then, many investors had been holding out hope that the earthquake in Japan in March would be just a temporary problem for industrial companies.
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