The Dow Jones Industrial Average fell over 250 points today, while the S&P 500 dropped over 30 points. That is the second worst day of the year for the stock market. So, what happened, lots of stuff… or nothing, depending on how you look at things.
Weak Economic Data
The U.S. economy has been growing very slowly for a while now. However, the markets seem to keep getting ahead of themselves and forgetting the “very slowly” part. Every time new economic data comes out that shows the economy is indeed only growing at a snail’s pace, the markets get hammered.
First up, the Federal Reserve announced it was cutting its growth and inflation forecasts for the rest of the year. Part of this is bad news. After all, the Fed’s growth projections weren’t exactly rosy in the first place. The second part, however, is good news. It means that all of that stimulus out there in the form of low interest rates and bond market maneuvers by the Fed are not causing inflation.
Banks and insurance companies are big losers are the news of a worse economy. People cancel insurance when they cut back on spending. In addition, a significant portion of insurance company profits come from investing premiums that are not used to pay out claims. A slower economy makes it harder for them to generate profits.
Banks also have a harder time earning money during a weaker economy as it becomes harder to make “good” loans and more lenders are late with payments or default entirely. However, the markets need to remember that many of the major banks don’t make so much of their money in lending anymore.
Just for fun, Goldman Sachs also suggested that its client consider shorting the S&P 500. (No word on whether Abby “Always Up” Joseph Cohen thinks the market will finish higher this year.) The firm’s research set a SP500 target of 1,285.
Next up on today’s bad news parade was data that Spanish banks will need a ton of money to survive. On its own that might not have moved the market much as this is more of the same out of Europe, which while treacherous down the road, has little immediate effect on the U.S economy.
Other news: Read about the 2012 529 contribution limits here.
Lastly, news out of China that manufacturing output is falling. On the one hand that is very disconcerting for commodities prices since it means the world’s largest manufacturer won’t need as much raw materials. On the other hand, such news isn’t shocking. If the biggest consumer of China’s manufacturing output, the United States, has a fragile, very slowly growing economy, the demand should be decreasing.
Moody’s also downgraded several major banks, but, as usual, they weren’t telling anyone anything they didn’t already know.
In other words, this is all just the same two problems that have been with us since before the beginning of the year. The U.S. economy is not growing fast enough to solidify a recovery, and Europe is knee-deep in some big economic problems that may pull the U.S. economy back into recession if they get big enough.
As is often the case, today’s big market moves are not significant to long-term investors who should already have a widely diversified portfolio.
For short-term investors, or for those who have been looking for a window to get into oil companies or financial companies, opportunity may have just knocked on the door.