More On Tuesday's Tumble

A more complete dispatch on yesterday's wild market action is available here, but a few new tidbits have come to light since the market closed yesterday that warrant additional discussion.

First, the sudden plummet the Dow took at 3:00 pm (when it sank an additional 200 points almost immediately) appears not to have been the result of programmatic trading or of margin calls forcing huge liquidations, but of a glitch in the computer system that calculates the value of the index.  The S&P 500 and the Nasdaq indices had appeared to be falling faster than the Dow, until 3:00, when the Dow suddenly caught up (er, down).

Second, the 9% drop in the Chinese stock market that catalyzed the global sell-off seems to have been triggered by more than mere market sentiment.  It's true that Chinese stocks had run up 13% in just a few trading sessions to new historic highs, so a pull-back might've been predicted to begin with.  But Tuesday's drop, the largest seen by the Chinese stock market in a decade, followed growing rumors that regulators were going to be introducing new measures aimed at curbing the widespread fraud and market manipulation that make China's equity markets so volatile in the first place.  It was rather ironic that such rumors would cause the market to tank, but Chinese investors are used to counterintuitive behavior in their stock market, where poor oversight, corruption, and limited information flows have earned it the nickname "dubo ji" ("slot machine").  In this case, the new regulations could make it more difficult for new speculative dollars to enter the market, which would mean less upward pressure on trading levels, hence the sell-off.

Third, as people are continuing to report today, the declines in the U.S. markets followed a day after Alan Greenspan made his recession comments.  As I've noted more than once, Greenspan never called a recession "likely", as the AP inaccurately reported, or anything close to it.  But that didn't stop the word "likely" from becoming the centerpiece of every headline about his comments.  It's been speculated that Drudge parroting the inaccurate "likely" tag and linking to the story helped fuel the sell-off.  This, I don't buy.  The institutional investors that moved the market yesterday had seen Greenspan's comments a full 24 hours before the sell-off and had assuredly dug deeper than the misleading headline.  The most cursory glance at the AP article in question would have been enough to assure any investor that Greenspan was not heralding a recession.  All that being said, the Greenspan factor probably wasn't helpful to overall market sentiment yesterday.

Fourth, the market has been waiting for this happen.  Stocks are up (well, were up) nearly 20% since last summer, without once undergoing so much as a 2% correction.  Today and tomorrow may see some pretty volatile trading, but if 400 points off the Dow constitutes the lion's share of this sell-off, this correction will have been fairly minor.  With the index as high as it is, we'd need to see another couple hundred points of selling to notch up even a 5% correction.

Fifth, to reiterate the case for optimism, yesterday saw two things that haven't occurred since pre-9/11.  Not only did the stock market fall 3+%, but the Consumer Confidence Index clocked in at 112.5.  The last time consumers were so ebullient was August 2001.  With consumer spending accounting for 70% of economic activity, this is a meaningful indicator.  Today's GDP report did revise downward the pace of fourth quarter growth, but the revised figure (2.2%) was close to what economists were expecting and still fits the label "slow-to-moderate growth" which is just peachy, given that the Fed appears to be in the flare stage of the "soft landing" it's been guiding toward.  Slow-to-moderate growth is right in the sweet spot for such an inflection point in the economic cycle: not so fast as to trigger inflation, not so slow as to approach recession.

Fifth, stocks are objectively trading at reasonable valuations, in terms of earnings multiples.  This offers a floor of support to trading levels that doesn't exist when a speculative bubble collapses.  As I noted yesterday, the S&P 500 index is now trading at a price/earnings multiple of roughly 17x, significantly below its 20-year average of roughly 22x.  Before the tech bubble burst, the index's P/E was in the 40s.

None of this is to say the markets won't be wild and wooly for the next few sessions (though thus far today, they appear to be staging a fairly orderly rebound).  But if this correction stabilizes with prices a few-to-several percent lower than they were Monday, then anyone who's been wanting to push some new money into the market, but was concerned about the recent run-up and was waiting for a more attractive entry point, ought to be going shopping.

Previously:
Market Takes Biggest Plunge Since 9/11
Consumer Confidence Highest Since Pre-9/11