So this happened last week. After floating above the 17000 mark for some time, stalled in its supposedly inevitable climb, the market took a dramatic shift southward. This is either short term (which they call "a correction") or long term (which they call "the start of a new recession ohmighod!"). Since that time, it has engaged is leisurely 200 and 300-point sweeps up and down the new posting of 16000.
Most times, when there is a major milestone crossed (up or down), there is no one thing one can point to, and the analysts are clustered around a grab-bag of theories. In this case, conventional wisdom seems to have coalesced into two big things - Oil and China. Neither is completely true by itself, but combined makes a market skittish.
Oil is in oversupply right now. Saudi Arabia is overproducing in order to drive other, more expensive oil production venues (like oil from Dakota shale or the Albertan oil sands or deep-water drilling in the Pacific) off the market. Add to that the fact that, with the end of sanctions, Iranian oil will be coming back online. As opposed to the era of OPEC when a gathering of like-minded oiligarchies gathered together to boost the prices in the 70s, now we see a lot of price-slashing.
And this should be a good thing for you and me, and indeed, gas prices have plummeted (well, in most places - not so much in the Pacific Northwest). Prices below two bucks a gallon are getting common. We should be happy, right?
Not exactly. The stock market has made as one of its foundation stones the idea that prices will continue to go upward, making the oil reserves a more valuable trade commodity. Taking that away makes them very nervous.
China has been booming over the past few years, and continues to grow. But the volatility of the Shanghai Stock Exchange, boosted by an influx of mid-level investors, have created a number of financial bubbles that have required the government has had to step into to fix once they burst. Given the size of the economy, when China sneezes, a lot of other folk catch cold. It is considered volatile and therefore bad, and as a result the other markets are volatile.
But the weirdness in all this underscores the nature of the DOW and other stock markets themselves. They seem to be based on fantasies of a magnitude greater than those spun by Tolkien or Dunsany. Low oil prices should result more money for the consumers which should result in greater consumer spending. China continues to grow in the midst its free-market teething problems (Oh, and on the West Coast, a lot of the money being made is being poured into US real estate).
This sense of fantasy is reflected in the reception of news on individual stocks as well. Company A had an amazing year, but because the forecast was for an even MORE amazing year, its stock has fallen. Company B shipped more units than ever this year, but next year looks less productive, so its stock has fallen. Company C has seen some key sales slip, but beat profit estimates, so its stock has risen. Go figure.
It does feel all kind of mystical, where things happen in outer world and then are retrofitted to justify whatever is happening within an economic hothouse environment. Yet I suppose that provides more economic solace than a Lovecraftian economic universe, where the invisible hands of uncaring finanical titans move without regard to the ripples of their passing make.
More later,