The Dow Jones Industrial Average has dropped precipitously in recent days to under 13,000; it was at 13,250 as recently as May 3. All other indices have fallen correspondingly.
Yesterday morning, the DJIA sank more than 1% to its lowest point in two months, but rallied in the afternoon to finish off only 70 points lower. The reasons for the markets’ volatility are attributable to a number of factors. Yet, the markets seem most sensitive to events in Europe.
To this point, austerity has been the mantra of most European governments. But, growing discontent has resulted in a change in leadership in France just a few days ago. With leadership changes, many fear that European governments will try to spend their way out of their current economic malaise exacerbating already untenable debt levels throughout the continent.
Specifically, in Greece, where financial reform is on one day and off the next, the latest assessment is that the government may give up its austerity plan. This observation was one of the most important reasons for the decline in the financial markets.
But, there are many other forces at work that are depressing the market. In America, the presidential election is weighing heavily on investors. As you might expect, when Obama’s prospects improve, the market falls, and when Romney’s prospects increase, the market rises. The former is based upon Obama’s perceived anti-business attitude and the implications of a Democrat win on tax reform (taxes will increase) and debt reduction (it will not happen with a liberal president).
Investors are also interested in safety and global events. Their reaction to negative political events has been to invest in dollars, specifically Treasuries (10-year treasuries dropped below two percent today spurred by strong demand). And, the latest terror plot to blow up an airliner was a downer for investors even though it was foiled.
The expectations related to corporate earnings are another source of great concern for investors. Although corporate earnings reports have been relatively strong lately, many investors are not sanguine about the longer-term prospects of earnings. The market reaction to this development has been to drive down stock prices to reflect less optimistic earnings later in the calendar year.
And finally, there were a number of other events and pronouncements that depressed investors further. The Saudis have stated that they believe oil prices should fall somewhat indicative of lower industrial activity. Boehner, the Speaker of the House, said the economy was slowing down. The consumer is not increasing spending as hoped. The recent jobs report was unsatisfying. Government stagnation continues in Washington.
In the short term, investors should anticipate market volatility and a slightly downward trend in the market.