| NEW YORK
NEW YORK Aug 1 Wall Street's worst week in two
years was enough to get investors worried about whether a
long-overdue correction is coming, but analysts are still
The S&P 500 ended the week down 2.7 percent, its biggest
weekly loss since June 2012, a decline that had followed several
weeks of selling.
The market is undoubtedly ripe for a correction - the
current rally has continued for nearly three years without a
decline of more than 10 percent. The Fed looks closer to raising
rates, and housing and auto sales figures suggest those markets
may be softening, if only temporarily.
"The summer has been just tough because there has been very
little to buy," said Kathleen Gaffney, portfolio manager of the
Eaton Vance Bond Fund. "But I think what is happening is we are
seeing the markets adjusting from an environment of lower
interest rates to higher interest rates - and that's producing
The Federal Reserve's monetary policy has been favorable for
the markets, and though the Fed is expected to begin raising
rates next year, the absence of wage pressures has kept moves in
Treasuries yields relatively muted.
While the spread between long- and short-dated Treasuries
has narrowed of late, which tends to happen as the economy
slows, the difference between the two-year and 10-year Treasury
notes is more than 2 percentage points - still a favorable sign
for economic growth.
On Wednesday, the Federal Reserve gave a rosier assessment
of the U.S. economy while reaffirming that it is in no hurry to
raise interest rates. The U.S. central bank also, as expected,
reduced its monthly asset purchases to $25 billion from $35
Although government data on Friday showed U.S. job growth
slowed in July and the unemployment rate unexpectedly rose,
recent economic data has been largely positive with growth in
second-quarter gross domestic product at 4 percent and favorable
revisions to first-quarter GDP.
The CBOE Volatility index, Wall Street's so-called
fear gauge, jumped to 17.03 from 12.69 after Portugal's Banco
Espirito Santo reported an unexpectedly large loss for the first
six months of the year that raised concerns about the bank's
solvency and after U.S. employment cost pressures came in higher
But the VIX remains well under the long-term average of
about 20, and stock valuations remain reasonable. The S&P 500
is trading at an average price-to-expected earnings ratio
of 15.4, which is not very stretched relative to the historical
average of around 14.1.
"The economic environment remains healthy. As such,
volatility should decline and stocks should rebound," said
Jonathan Golub, chief U.S. market strategist at RBC Capital
Even so, the fact that the benchmark S&P 500 hasn't been
able to crack the 2,000 milestone despite a few approaches
suggests some exhaustion is setting in.
(Additional reporting by Jennifer Ablan in New York and Nandi
Kaul in Bangalore; Editing by Leslie Adler)