In the week or so the stock market has been whacked down quite a bit. If you’re short it looks quite nice, but it’s still puzzling.

Outside the United States, most countries are showing a willingness to take the hard decisions to increase consumer taxes, cut spending and so cut deficits. This is not usually a reason to see the stock market take a tumble. So what’s spooking the markets? OK, Japan’s economic growth was less than expected, but that didn’t really seem to affect the market much at all.

The first thing to remember is that it is August, and so volumes are low which will tend to exaggerate market movements. Last year it was the “office junior rally” and this time round it’s the “summer intern dip”.

The second thing is that this seems to have seriously got going in Japan, where there are serious worries about whether the Yen is overvalued and whether the Japanese economy can keep on exporting. The dip in economic growth didn’t help either. In the long term Japan may be a compelling story, but it is still a worry that Japan has to some how deal with.

However there is also the fact that the relief rally went far too far. While its undoubtedly good news that we won’t be scavenging off the streets and that civilization as we know it has pulled through, this does not make it the veritable boom that is priced into the market. The market had overshot, as it usually does, and needed a correction. There’s probably still some correction left, but how on earth can we tell?

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