Earlier this year the stock market in the United States had moved up more than 60% from its low, based largely on the hopes of a strong economic recovery. Fast forward to June 2010 and the market is now in a correction and has lost about 13-14% of its value in the last few weeks. Why has the market reacted so violently in the last few weeks? The single biggest reason for this drop in value is clearly the lack of investor confidence in the economic recovery.

The most recent economic numbers are still better than they had been a year ago, but they are far short of what most had been hoping for. Last week is a perfect example of the level of disappointment that the current economic numbers are bringing. Many economists were expecting 550,000 or 600,000 jobs created, but in reality the May employment report was weak. The census hiring made the number look good, but the private sector created a scant 41,000 jobs in the month. The day before the retail sales figures showed that the consumer isn’t diving back into the economy like many had hoped. The news wasn’t terrible, but it was much less encouraging than many were expecting.

The flash crash of May 6th also hurt investor sentiment and the last thing this market could afford was a bunch of scared individual investors. The summer doldrums is now getting ready to become a more important factor, so don’t be surprised if volume is low in the weeks and months ahead.

The bottom line here is that it is absolutely clear now that there is no V shaped recovery taking place. The recovery isn’t completely dead, but it is on much weaker footing than many thought it might be at this time. The hope here is that this market consolidation will lead to a longer-term uptrend in stocks and the economy, but for now the disappointment is bound to weigh on results in the short-term.

How will the U.S. economy recover? Every pundit in the stock market has own opinion on this. Some experts thought that economy will recover in V shape, meaning that sharp plunge will be followed by sharp recovery. So far, it seems to be the case. Some thought that we will go thru U shaped recovery. Some argued that U.S. economy will recover only in W shape (sharp plunge + some recovery + sharp plunge + sharp recovery).  Some thought it could be L shaped or Square-root shaped.

Just when you think that you heard all predictions from stock market gurus, someone comes out with the prediction of “Reverse square root” shaped recovery! Greg Ip, U.S. economics editor for the Economist, thinks the recovery will be the combination of a sharp fall down, a sharp rise part of the way back up, and a long struggle.

I don’t believe in the “reverse square root recovery” theory. Economy is already turning around. Only missing piece is the employment. I see hiring picks up everywhere. We are having difficulty filling in some positions. Number of quality resumes we get also fell down in the recent weeks. My friend in M&A firm tells me that merger activities picked up lot of momentum in the last six weeks. At this point, I will just ignore the “reverse  square root recovery” prediction.