The U.S. equity markets started to lose momentum when weekly leading indicators began to soften (unemployment claims, ECRI, etc.). Interestingly, pundits were quick to blame this correction on events taking place in Europe or, more specifically, in Greece. We’ve had a hard time believing this as many gauges of financial stress in Europe have improved during the most recent market correction. If Europe is the true problem here then why isn’t the European TED spread rising? It’s actually fallen in recent weeks. The answer is that something else may be responsible for this market correction and it might just be U.S. made.

  There is no doubt in our mind that a decline in equity markets may eventually translate into slower economic activity ahead. The riddle is trying to figure out why equities are going down. Investors will usually look at CNBC and whatever is on the air will become the reason behind the decline in stocks. In this particular case it was Europe. Interestingly, there are series that called for a soft patch and a market speed bump. Indeed, the relative performance of early cyclicals highlighted an air pocket ahead many months ago. Admittedly, we did not think it could lead to such a powerful sell off. That said, the relationship argues it’s about to come to an end and the markets ahead are more likely to resemble those of the first quarter than those of the past two months. As we see it, this pullback is about the U.S. as much as it is about Europe and one part at least of the equation is about to change for the better. Something to ponder with sentiment readings at bearish extremes.