On Monday, the Dow Jones industrial average looked like it was in big trouble, seemingly on the verge of its first major breakdown since the summer of 2011, when it fell hard after the USA was stripped of its triple-A credit rating. It kicked off this week with a 326-point downdraft, its biggest drop in seven months. It was staring at a year-to-date loss of 7.3%. It appeared to be crumbling under the weight of turbulence in emerging markets, signs of a manufacturing slowdown at home, and a growing feeling that the bullish vibe that's been in place since 2009 and which turned giddy in 2013 was fading fast.
By Friday, after back-to-back days of triple-digit point gains totaling 354 points, the Dow had regained some of its swagger. It erased all of Monday's losses and slashed its 2014 loss to 4.7%. It also shrugged off a second straight month of weaker-than-expected job gains.
The rebound was so swift and so surprising that it had Wall Street suddenly asking if the lousy start to 2014 was finally winding down?
The jury is still out on whether the worst is over for stocks.
Where the bulls and bears collide is on the question of whether the U.S. economy will continue to heal and provide enough of a tailwind for a stock market that is no longer undervalued after posting its best year in 2013 since the late 1990s.
"The correction is correcting itself, thanks to investor confidence in the strength of the U.S. economy," says Joe Quinlan, chief market strategist at U.S. Trust. "The big move down in the U.S. is behind us."
Even though the U.S. economy only generated 113,000 jobs in January, well below the 180,000 or so expected, Wall Street bulls are still betting that once the wintry weather exits, the U.S. economy will fare just fine.
With much of the emerging market angst already priced into stock prices and U.S. corporate earnings holding up fine, bulls point to the continued health of the services component of the economy! , and the fact that the unemployment rate, now 6.6%, and the number of folks filing for unemployment benefits for the first-time continue to fall.
No so fast, says hedge fund manager Todd Schoenberger, managing partner at LandColt Capital.
Recent signs of a manufacturing slowdown and job market weakness are indications of trouble, he says, adding that investors are betting on the Federal Reserve bailing out markets yet again.
"Is the correction over? Absolutely not! (This) is a sucker's rally," says Schoenberger. "Markets are rallying on false hope that the economy and future earnings reports will be strong enough to sustain a 2014 bull market. The key takeaway here: Buyer beware!"
If anything, the market already appears to be in a bottoming process, adds Jim Paulsen, chief investment strategist at Wells Capital Management. Stocks have been refreshed by the sell-off, as price-to-earnings ratios have come down by a full point, bond yields are lower and investor optimism has cooled, he says.
"I think the basic force ending the sell-off is evidence that economic momentum in the U.S. economy remains OK," says Paulsen.
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