Would it be more or less reassuring to know exactly why the U.S. stock market plummeted Tuesday, with the Dow Jones industrial average dropping 415 points, or 3 percent of its value?
In the press coverage of Tuesday's market "correction," traders and analysts cited a variety of reasons for the abrupt fall. The massive plunge of the overheated Chinese stock market. The unexpectedly large decline in "durable orders" -- an economic indicator that measures the economy's appetite for significant manufactured goods like Boeing 747s. The assassination attempt on Dick Cheney in Afghanistan. Alan Greenspan's mention of the word "recession" on Monday. The renewed climb of crude oil prices. There has also been plenty of nervousness about trouble in the subprime lending market, and a general sense that the market, which has been routinely hitting high marks, was due for a reset.
This is known as the kitchen-sink explanation for market behavior. Or, in other words, we really don't have a clue why the market spooked.
Early reports are saying that the Dow's 550-point midday plunge marked the worst day for U.S. markets since Sept. 17, 2001. That debacle, in contrast, was easy to explain -- it was the first day of trading after Sept. 11. After the worst terrorist attack on U.S. soil in history, aimed dead center at the very heart of American finance, few people were surprised that the stock market immediately collapsed.
From that perspective, Tuesday's drop almost seems more alarming -- because the lack of a single all-explanatory factor suggests that traders and investors are in a state of deep nervousness over where the economy is headed, and they are ready to bolt for the exits at a moment's notice. All it took was a discouraging word from Greenspan, a meltdown in Shanghai and a suicide bomber in Afghanistan, and they were off!
But you never know. On Wednesday traders looking for bargains could swoop back in, and few market observers would be surprised to see a sudden lunge back up. Certainly, if you look at a chart of the Dow over the last five years, you will see little reason for pessimism. Sure, there have been some minor setbacks along the way, but the overall trend line has been up, up, up. How much can you complain when your correction comes after a record high?
A more somber interpretation would be that this break recognizes that the business cycle is reaching an inflection point, that a recession is on the way, and a bear market is now upon us. The beginning of a real bear market on Wall Street, coming on the heels of the weak housing sector, and with oil prices once again on the move, could signal serious economic trouble ahead. When the value of shares keeps rising, all kind of things become possible, but it's a whole different story when the direction headed is down. That is when weak Wall Street financial players get weeded out, and cracks in the overall structure of the system get exposed. If the proliferation of hedge funds dealing in exotic derivatives has miscalculated the amount of risk that they are exposed to, then Tuesday's sell-off could just be the beginning of a long-feared shakeout.
I imagine that there will be more than a few people having trouble sleeping tonight in New York City.
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