Suitably Flip

Market Takes Biggest Plunge Since 9/11

Earlier today, I noted that the Consumer Confidence Index had hit a new post-9/11 high.  As the day wore on, what started as ordinary economic nail-biting resulting from a fall-off in durable goods orders and yesterday's distorted reporting on Alan Greenspan's recession comments joined forces with the global pall that the huge Shanghai stock sell-off had cast over international markets.  Together, they conspired to finally trip up the virtually undaunted bull market that has sent the Dow Jones Industrial Average 18% higher since last July, without so much as a 2% correction along the way.

Today, when the dust had settled, the Dow was off 3.3%, having fallen 416 points, the biggest single session decline since the 9/11 attacks.  (When the markets first re-opened on 9/17/01, the Dow closed down 685 points from its 9/10 level.)  At one point late in today's session, the index had plunged more than 550 points on a big spike in volume (check out 3 pm below), apparently the result of programmatic trades triggered by the steep sell-off and/or institutional investors trying to cover margin calls by liquidating big positions in large cap stocks.

An eye-popping sell-off?  Yessir.  Time to panic?  No.  Kindly get a hold of yourself.

As I mentioned this morning (300 or so points ago), the troublingly uni-directional nature of the equity markets over the last 9 months has been suggesting that a correction of 5% or so was likely in order.  While the immediate-term effects of such a steep sell-off can be self-reinforcing (as observed today) and therefore somewhat dramatic, the day's declines don't impair the strong economic fundamentals (low inflation despite nearly full employment levels, high productivity, strong consumer spending, real economic growth), nor are they likely to mark the beginning of a significant, sustained stock market sell-off, as the market is frankly very reasonably priced (even more reasonably after today), as measured by price/earnings multiples.

Following today's sell-off, the 500 stocks that comprise the S&P 500 are trading in aggregate at roughly 17x their annual earnings.  That's well below their 20-year average of 22x and way below their bubbly peak of 46x!

So today was painful if you're long the equity market.  But it's probably premature to be opening any high-floor windows.  That's not to say the slide couldn't continue over the next couple sessions, but once the correction has had its fun and the curiously undaunted bull has finally been humbled, the market will be far better poised to digest the stream of generally favorable news that the strong economy is likely to continue throwing off for the foreseeable future.

Previously:  Consumer Confidence Highest Since Pre-9/11

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Update:  The Corner points out this U.S. News opinion piece, wondering if the Drudge Report linking to the AP's mischaracterization of Greenspan's recession comments (and repeating the mischaracterization in the text of the link, namely that Greenspan had said a recession was "likely" when he clearly did not) may have contributed to today's dour mood on Wall Street.  I tend to doubt it, as Wall Street had been well aware of Greenspan's testimony for a full 24 hours before the sell-off.

Still, I too had noticed the Drudge link and his unfortunate choice to echo the inaccurate AP charactization of the story.  I found it sufficiently materially misleading that I decided to e-mail Drudge last night and helpfully point out my calling the AP out on it earlier in the day.  My note to Drudge read, in part:

I saw you'd linked the AP story about Alan Greenspan's comments about a possible recession before year-end.  I was amazed to read this article this morning, given the headline, because it turns out that all Greenspan said was that he couldn't rule out a recession, and he even noted that a recession is unlikely and something most economists do not predict.

There is indeed an interesting story here though; it's the gross micharacterization of Greenspan's comments by the Associated Press.

Alas, my comments fell on a deaf inbox, as the link remained intact (though it'd been demoted from red to black) and with the misleading description as of this morning.  Whether in response to publication of the U.S. News piece is hard to say, but I see the link has now finally disappeared from the Drudge Report (and a link to the piece speculating about Drudge's involvement in precipitating the sell-off has appeared).

Comments

Market Takes Biggest Plunge Since 9/11

Earlier today, I noted that the Consumer Confidence Index had hit a new post-9/11 high.  As the day wore on, what started as ordinary economic nail-biting resulting from a fall-off in durable goods orders and yesterday's distorted reporting on Alan Greenspan's recession comments joined forces with the global pall that the huge Shanghai stock sell-off had cast over international markets.  Together, they conspired to finally trip up the virtually undaunted bull market that has sent the Dow Jones Industrial Average 18% higher since last July, without so much as a 2% correction along the way.

Today, when the dust had settled, the Dow was off 3.3%, having fallen 416 points, the biggest single session decline since the 9/11 attacks.  (When the markets first re-opened on 9/17/01, the Dow closed down 685 points from its 9/10 level.)  At one point late in today's session, the index had plunged more than 550 points on a big spike in volume (check out 3 pm below), apparently the result of programmatic trades triggered by the steep sell-off and/or institutional investors trying to cover margin calls by liquidating big positions in large cap stocks.

An eye-popping sell-off?  Yessir.  Time to panic?  No.  Kindly get a hold of yourself.

As I mentioned this morning (300 or so points ago), the troublingly uni-directional nature of the equity markets over the last 9 months has been suggesting that a correction of 5% or so was likely in order.  While the immediate-term effects of such a steep sell-off can be self-reinforcing (as observed today) and therefore somewhat dramatic, the day's declines don't impair the strong economic fundamentals (low inflation despite nearly full employment levels, high productivity, strong consumer spending, real economic growth), nor are they likely to mark the beginning of a significant, sustained stock market sell-off, as the market is frankly very reasonably priced (even more reasonably after today), as measured by price/earnings multiples.

Following today's sell-off, the 500 stocks that comprise the S&P 500 are trading in aggregate at roughly 17x their annual earnings.  That's well below their 20-year average of 22x and way below their bubbly peak of 46x!

So today was painful if you're long the equity market.  But it's probably premature to be opening any high-floor windows.  That's not to say the slide couldn't continue over the next couple sessions, but once the correction has had its fun and the curiously undaunted bull has finally been humbled, the market will be far better poised to digest the stream of generally favorable news that the strong economy is likely to continue throwing off for the foreseeable future.

Previously:  Consumer Confidence Highest Since Pre-9/11

---

Update:  The Corner points out this U.S. News opinion piece, wondering if the Drudge Report linking to the AP's mischaracterization of Greenspan's recession comments (and repeating the mischaracterization in the text of the link, namely that Greenspan had said a recession was "likely" when he clearly did not) may have contributed to today's dour mood on Wall Street.  I tend to doubt it, as Wall Street had been well aware of Greenspan's testimony for a full 24 hours before the sell-off.

Still, I too had noticed the Drudge link and his unfortunate choice to echo the inaccurate AP charactization of the story.  I found it sufficiently materially misleading that I decided to e-mail Drudge last night and helpfully point out my calling the AP out on it earlier in the day.  My note to Drudge read, in part:

I saw you'd linked the AP story about Alan Greenspan's comments about a possible recession before year-end.  I was amazed to read this article this morning, given the headline, because it turns out that all Greenspan said was that he couldn't rule out a recession, and he even noted that a recession is unlikely and something most economists do not predict.

There is indeed an interesting story here though; it's the gross micharacterization of Greenspan's comments by the Associated Press.

Alas, my comments fell on a deaf inbox, as the link remained intact (though it'd been demoted from red to black) and with the misleading description as of this morning.  Whether in response to publication of the U.S. News piece is hard to say, but I see the link has now finally disappeared from the Drudge Report (and a link to the piece speculating about Drudge's involvement in precipitating the sell-off has appeared).