Correction cometh

The last few days of July were ugly for stock market investors. Fears about problems in the credit markets and the effects of the recession in residential construction that had been brewing for more than a year finally spooked investors.

As our graphs show, and as I have written in previous pieces, the markets have been charging ahead for several months, with strong growth following the previous market correction in February. With this background, it was pretty much inevitable that the markets would take a dive sooner or later, and the longer the rally went on, the more nervous investors got.

The effects on the heavy equipment sector were profound, with the ACT HEI dropping more than 7% in a single day. Some $4.2 billion worth of equipment manufacturers' shares changed hands that day – about 3% of the industry. This volume was the second largest one-day sell-of in the history of the ACT HEI, and represented about three times the average daily volume of trades in the industry.

The following days saw more higher than average volumes, and again some steep falls around the 4 to 5% per day mark. There was some rebound in early August, but over the course of the last 10 days in July the ACT HEI fell from a record high of 195.05 points to a low point of 170.28 points – about a 13% fall in value.

At the time of writing, the markets remained volatile, and further wide swings were expected throughout August and into September before share prices find some stability with more sensible valuations.

Panic?

But although the markets are suffering from one of their semi-regular periods of turbulence, it would be premature to say this is the start of a bear market. Although the American economy is suffering this year with its sub-prime credit worries and house price recession, the rest of the world continues to grow and show resilience.

This is best illustrated by this year's half-year results for heavy equipment manufacturers. Caterpillar, the bellwether for the industry, saw profits slip in the second quarter due to the slump in demand for both machinery and on-highway engines, but in Asia and Latin America, where its equipment sales were up 35% and Europe (up 23%) helped offset this disappointment.

The crane market provides even stronger evidence of the underlying strength of the market, with both Manitowoc

Crane Group and Terex Cranes reporting increasing sales, better profits and ever-lengthening order backlogs.

So the American economy may be in the doldrums this summer, and the high oil price is not helping, but on a global scale these are the only downsides to a generally buoyant outlook.

It should also be said that, despite the recent corrections, the markets are still well in the black for the last year. Even the weakest performer, the S&P 500 is up more than 16% over the last year.

There are likely to be more falls ahead, but it's not time to sell your shares and stuff the cash in a mattress just yet