Just a Pullback or More?

06/13/2014 12:01 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The recent lowering of global growth forecast by the World Bank initially triggered some profit taking and MoneyShow's Jim Jubak wonders whether a stronger reaction is likely.

For the week ahead, see whether the downgrade on global growth from the World Bank on June 11 leads to serious worries about pricing, valuation, and growth, or simply produces what I think, a slight pullback in an overbought market. What the World Bank said, they lowered their projections for global growth-that's growth for the aggregate global economy-for 2014 to 2.8% from January's projection of 3.2%, so, fairly significant. A lot of this came from a downgrade in US growth, which only made sense because you had a really bad first quarter result in the US, with a contraction in US growth of about 1%. You project that over the years, so it figures out that US growth would be lower, but there's no pickup in developing economy growth that would, in fact, make up for this. The World Bank cut its projections for developing economy growth to 4.8% for 2014 from 5.3% back in January. This is going to be the third year in a row when developing market growth, developing economy growth, looks like it's going to be below 5%. That's fairly significant. They're seeing a slowdown, mostly in China, but not just in China. They're getting slowdown in Brazil, Turkey, South Africa, etc. so still pretty good growth but not what you'd expect and not what you need to make up for the US.

When that came out, we had a slight selloff in US markets. The Dow went down about a half a percentage point, the S&P 500 about three-tenths of a percentage point. Given the fact that we've had a really strong rally since March 15, with the Dow up 3% and the S&P up 4%, you had an oversold, overbought market that was really looking for some kind of a pullback and I think that's all we're seeing, but I could be wrong. I have been wrong in the past. We could see more worries about global growth filtering into a longer-term correction that's more than just a pullback of a few days, or a week, or so. That's what I'd be looking for here, to see whether we're going to get something more serious than simply a pullback in an overbought market, or we're going to get something more serious, which is a longer-term sell off for maybe like 2%, 3%, 4%, or 5% on these kinds of worries and valuations. We are looking at, after all, US stock markets that are trading at all-time highs.

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