What does the stock sell-off mean?

By Felix Salmon
August 4, 2011
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At 8:30 tomorrow morning, the July jobs report will come out, and it’s almost certainly going to be pretty miserable, with headline employment growth of maybe 100,000 new jobs, significantly less than needed just to keep up with population growth. The jobs report is rightly renowned as the most market-moving of all economic indicators, and so market action in the immediate wake of its release is closely watched.

What’s going on here? If anybody tries to tell you we’re seeing “fears of a double-dip recession,” or somesuch, ignore them. Fears of a double-dip recession do not appear overnight, and do not send markets down 3.5% in the course of a morning. When vague “fears” are cited as the prime reason for a sell-off, you can be sure that in fact there’s no reason at all. Markets are volatile things, and sometimes this kind of thing happens. If you can’t stand it, you shouldn’t be invested in stocks in the first place.

One thing you can be sure of: all tomorrow’s reports about how markets have reacted to the employment report should be taken with an enormous pinch of salt. At this point, it’s impossible to know what’s priced in and what isn’t, and in any case this kind of volatility would normally last a second day in any case. Whatever markets do tomorrow, they might well have done anyway even if the employment report hadn’t come out.

If markets hadn’t moved much today and instead this sell-off had happened tomorrow, it’s certain that everybody would blame the employment report, no matter how good it was. It’s one of the basic tenets of market reporting: if markets move on the day that non-farm payrolls are released, then there’s always a direct causal relationship between the move and the report.

So it’s worth remembering, on days like this, that sometimes we don’t know why markets have moved, and sometimes there simply is no reason.

But that said, a couple of things are worth noting.

Firstly, this is not necessarily a Bad Thing. If you’re saving for retirement, stocks are cheaper now, and your 401(k) contribution goes further than it did a few weeks or months ago. That’s good.

Secondly, if there ever were serious doubts about the USA’s creditworthiness, they’re gone now. The 10-year bond is yielding less than 2.5%: there are no worries in evidence there.

Put those two things together, and you can even be quite happy about today’s sell-off. If you’re a debtor rather than a saver, then falling interest rates are good for you. If you want to buy a house, then falling mortgage rates — not to mention falling home prices — are also good news. And if you want to invest in some wonderful future income stream, then money’s cheap right now to do so.

Still, the future of the global economy is very uncertain, and southern Europe in particular is still far from any kind of sustainable resolution. The US economy has no particular exposure to Greece — but Italy is another matter entirely. This is a global sell-off, with European markets down just as much as those in the US; Asia’s sure to follow suit when it opens. Now that the Fed has stopped dropping dollar bills on the US economy, it’s hard to see where confidence and optimism are going to come from in the coming months.

In general, I’m not a fan of extrapolating broad macroeconomic hopes and fears from the first derivative of the S&P 500. We’re at 1,220 right now: that’s low compared to the 1,350 of a few weeks ago, but it’s high compared to the 1,120 we saw a year ago — and certainly compared to the 735 we saw at the depths of the sell-off in 2009. If you look at levels rather than deltas, there doesn’t seem to be any big reason to worry — the stock market is showing a reasonably healthy optimism about future long-term growth.

Which, of course, just means that there’s a lot further to fall if we are indeed headed into a double-dip recession.


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Markets reporters absolutely confuse correlation and causation (it’s more or less a requirement of the job, it seems). But still, sometimes correlation may in fact reflect causation — it’s possible that people really are selling off in anticipation of an abysmal jobs number tomorrow (however reasonable that may or may not be).

There’s no way of knowing for any given report/selloff, but you could run some statistical tests to see how often the market sells off by how much before jobs reports of various severities, and to gauge the significance of any correlation.

Posted by tf2 | Report as abusive

Deflationary depression — the good news we’ve all waiting for! Spin, Felix, SPIN!

Posted by rvaliant | Report as abusive

“What’s going on here? If anybody tries to tell you we’re seeing “fears of a double-dip recession,” or somesuch, ignore them. Fears of a double-dip recession do not appear overnight, and do not send markets down 3.5% in the course of a morning. When vague “fears” are cited as the prime reason for a sell-off, you can be sure that in fact there’s no reason at all.”

I’m not sure follow your argument. It’s quite true that it’s possible to over-explain everyday fluctuations of the stock market. But that doesn’t mean that October 29, 1929 didn’t have any significance.

In order to infer causation, let’s not set a standard that holds correlation between public events and stock market responses to milli-seconds. Something important just happened. The U.S. government — in it’s infinite power and wisdom — decided that there was no future in stimulating the economy. In fact, the opposite. Not many comments afterwards from Wall St. were encouraging.

Where were the economic fundamentals to justify a rise in the stock market to pre-housing bubble levels? What the large decline today shows is that we have had re-ignited a speculative bubble in the stock market (aided by QE2) that is now (probably) correcting. In the long-run, this is healthy. In the short run, it is another indicator of public lack of confidence in the future of the world economy.

Posted by jbernar | Report as abusive

Gold is falling, is the correction complete?

Posted by BDIH | Report as abusive

Felix, sorry but it is complete nonsense. We had many warnings from professional economist and plenty, plenty of preparation time. Which I used so I lose nothing in this market.

Of course, the traders were saying “This time will be different!”. Like always, there is a record peak in front of a major collapse.

You want prediction ?

After the first hit, many will say “oh, this is only temporary”. What in fact happens is that many traders start to adjust to the new, lower prices.
Then, one moment soon enough it will become apparant that the new lows are not save enough (contamination fears) and sell-offs start to speed up. Those will only stop when traders realise they have sold off way too much. Then, only then will we have a new base.

Posted by FBreughel1 | Report as abusive

I’d love to see the stats on how many 4% one day market declines ended up happening “no reason at all.”

Posted by changeling | Report as abusive

Today was the 9th biggest single-day drop in DOW Jones history, according to CNN. I don’t believe this would happen for no reason.

And fears of a double-dip recession didn’t appear overnight, Felix. We have seen front-page headlines from many economists talking about increased chances of a new recession for weeks now.

Ignore Felix sounds like a better plan.

Posted by rarn80 | Report as abusive

Time to buy.

Posted by levinsontodd | Report as abusive

You’re confusing “reasons” and “causes”. Perhaps “there simply is no reason”, but there sure is a cause of today’s crash.

Posted by Kamekon | Report as abusive

The reality of election 2010 has finally set in. U3 unemployment started climbing after a fitful decline. Signs of a local economic slow down started in February, and have been getting more obvious in recent weeks.

Thanks to Republican Tea Party actions, the deficit will start to soar again as tax receipts start to decline, and Treasury rates rise on worsening economic fundamentals. Yes, the President will fall, but so will the number of employed workers.

Posted by SanPa | Report as abusive

I’m also struggling to find happiness in today’s sell-off. My take is different, Felix:
– Firstly it can only help me if ‘stocks are cheaper today’ if I was planning to spend more today than I had accumulated over the period when they were more expensive. Otherwise, my average price still reflects a loss.
– Secondly the 10-year Treasury rate didn’t respond because those who have been doubting the US recovery are already at the safer ‘short end’.
Let’s hope for true happiness before the weekend :)

Posted by Noble-Savage | Report as abusive

Felix, investors will sell out of 1-month Treasuries as fast as they bought in, if they get reason to do so. Once the double-plunge U.S. recession takes shape in coming days, they’ll all start worrying (and rightly so) about the future of U.S. finances and whether Treasuries are safe after all. The dike will break.

I think “Ignore Felix” is a great plan too.

Posted by NukerDoggie | Report as abusive

An easy to understand reason stocks tanked today — more people were selling than were buying.

ALOT more people were selling than buying, causing the big drop.

Now as to why that is?

My take – Paul Krugman believers (cutting gov spending during weak recovery is bad and will tank a weak economy) were selling, and Grover Norquist believers (not raising taxes on “job creators” will cause them to go out and start hiring) weren’t buying.

Posted by gordo365 | Report as abusive

Felix, if you can’t see the truth in what I posted on Wednesday at 12:50 pm, then I really have nothing further to say. Reposted here for your convenience:

Two weeks ago, despite a reasonably strong earnings season, fears of a debt crisis started casting a shadow over the stock market. Now we have a debt deal, one that isn’t particularly unfriendly to business as far as I can tell, and the market continues its slide.

Are we experiencing what I feared the most? That a grand-standing Congress would tip a chaotic system into decline. I think everybody expected that they would reach SOME deal, but the uncertainty and the acrimony involved has led to rising doubts about the economy.

The markets, and the economy as a whole, are a confidence game. When people have confidence in them, they expand. When confidence fails, they fall. The Shiller P/E index has warned of a 30%+ decline for a year now. Has Congress pushed us over the edge?

Markets don’t trade on news, they trade on sentiment. In this case we have a grossly overpriced market, an obviously unstable situation, and we had a powerful driver for negative sentiment.

Once it gets a good head of steam going, the market declines feed the negative sentiment which feeds further market declines. That cycle continues until the values are so tempting that those who are driven by such factors step back into the market — but we’ll need a retreat to more rational valuations first.

Posted by TFF | Report as abusive

The only real big news seemed to be BOJ’s announcement that they would be supporting the Yen, following Switzerland’s like announcement yesterday. That support could have a depressing effect on exports from the U.S. and Europe, relative to Japan, but that doesn’t smell like an explanation. The jobs expectations are just that, expectations. Usually that results in the market holding steady until the expectation becomes a known quantity.

What is puzzling me is the sell-off in equities, commodities and precious metals all at the same time. That money canNOT all be going into bonds.

This smells like governmental intervention, and not likely the U.S. government. Hmmm… who would want treasuries supported?

Posted by BowMtnSpirit | Report as abusive

“That money canNOT all be going into bonds.”


Posted by TFF | Report as abusive

I’ll second SanPa’s view above that “The reality of election 2010 has finally set in.”

Also, Paul Kasriel wrote (June 6, 2011):

“We see a greater risk of the 10-year yield moving down to its early-October 2010 level of about 2.40% than moving back up to its early-February 2011 level of about 3.75%.”

http://www.safehaven.com/article/21260/e conomy-brakes-even-before-fed-takes-its- foot-off-the-accelerator

Kasriel also said that slowing demand in emerging markets & continued weakness in US employment will “set up the prospect for QE3 either later in the fourth quarter of this year or early in the first quarter of 2010.”

http://www.safehaven.com/article/21686/c ould-there-be-qe3

Posted by dedalus | Report as abusive

“headed into a double-dip recession.”
Double-dip? OK, except apparently nobody told Mainstreet, USA the FIRST RECESSION was over two years ago!

The first recession may be over for the US government and the big multi-national corporations but it sure as hell is not over for middle class America.

So, do not use the term double-dip recession unless you make sure you distinguish between small business USA and the Fortune 500, there is a difference…

Posted by stanrich | Report as abusive

For what it’s worth (next-to-nothing) I was a buyer today. Days like today are the reason I always like to have 10% cash in my retirement account… 9 down days out of 10 with a 500 point bloodbath as the iceing on the cake… delicious entry point for the last of my dry powder.

The market is laughing in my face on my “what is the most investable risk free asset theory”… and the market is dead wrong. I’ll take me some global bluechips at 14x earnings over 10 year T-Bonds at 40x their coupon payments any day of the week and twice on Sunday.

Good night and good luck!

Posted by y2kurtus | Report as abusive

Can’t have US T-Bills and USD soaring without money moving from stocks… worldwide 4-5% drop, sounds about right with 10yr yields going from 3.05 to 2.51 in four trading days and the new auction only for $72B

Posted by CDN_Rebel | Report as abusive

‘vague “fears”’ . . . ‘if there ever were serious doubts about the USA’s creditworthiness, they’re gone now.’ . . .

You’re sure about these statements, are you ? ? Well it looks like you might be the only one….

Posted by edgyinchina | Report as abusive

I think the crash happened because everyone in the States found out Salmon is in Schnitzerland and thus the markets here were wandering around leaderless. Makes about as much sense as the rest of the financial whiz bangs’ explanations. You weren’t even there a week and already SFr is getting corrected. Enjoy ..

Posted by Woltmann | Report as abusive

The phrase “irrational exuberance” has been ringing in a deja vu feedback loop all day today.

Like: Did we not expect this?

More like: Are we still deluding ourselves that this is really a recession?

Isn’t this “Double-dip” qualifier just a denial of the inconvenient truth, that we are experiencing an historic de-leveraging which will last a generation?

During all that “gilded age” wealth spree of the prior decade, didn’t anyone notice that all that “wealth” was completely artificial?

Or how all of those “jobs” now “lost” were unnecessary remnants of a post-industrial era?

As much as I hate to invoke clichés like “the new normal,” the fact on the ground is that we can’t deny the onslaught of the new normal.

And, no, I’m not a quant, but when you’re watching a rocket fall to earth in a fiery explosion, you don’t need to be a jet-propulsion engineer to know a malfunction has occurred.


Posted by EricVincent | Report as abusive

Investors are adjusting to the apprehended realities of coming realities of global economies followed by U.S. economy.

Posted by vksaini | Report as abusive

Tonight, just before the close of the Asian trading session (12:40 EST), the Japanese Yen dropped like a rock, falling 100+ pips in 2 minutes on large volume — and then shortly thereafter it completely retraced the move. I heard that it was NOT the BOJ intervening a second night in a row but rather a bank or hedge-fund attempting to “spoof” the market into thinking that it was a BOJ intervention.

The Jpy fell 100+ pips on heavy, heavy volume . . . in an attempt to spoof the market? That’s insane.

If anybody knows anything more about the source of tonight’s JPY mini-crash, please do tell or direct me to a website/blog where I might learn more.

Posted by dedalus | Report as abusive

Days like Thursday are the reasons why I hedge opportunistically, by buying optimal puts. Being hedged on a day like Thursday is like being dry and comfortable inside your house when there’s a raging thunderstorm outside.

I’d rather be dry and indoors, then out in the rain consoling myself with the usual spiel about how it’s good for long term investors when the market tanks.

Posted by Dave_Pinsen | Report as abusive

Why the drop? Confidence in the US has been shaken by the recent actions of the ultra-right wing Tea Party led Republican attack on the world’s money. Not only were they economically irresponsible, they also succeeded so well in focussing world attention on the inherent weakness of the US system and how a bunch of lunatic fringe politicians who seem to be clones of that Alaskan woman who says she can “see Russia from my backdoor!” can upset the applecart for selfish political gain that the world got nervous.

After the fear-freeze up to the debt ceiling extension deadline, markets could reflect upon what could have happened, and while the spotlight was still shining on the US economy they had a closer look at just how ‘safe’ it really was, and how much growth expectations were perhaps based too much on the US having responsible politicians, dependable economics, and a growing economy.

Whether this will be temporary or more long term we will have to see, but the US now has a difficult job rebuilding the lost world confidence in itself.

Posted by FifthDecade | Report as abusive

I must say Felix I really enjoyed your article and I am also glad so many people disagreed with you in the comments section. As these are the people that help create great buying opportunities for the likes of you and me buy driving the prices down. I look forward to reading more articles from you.

Posted by Blake7 | Report as abusive

Reducing liquidity through the ending of QE now could have the same effect that increasing interest rates did in the 1920s. Just because this time it’s Nations with the problems, not countries, doesn’t mean we should ignore the lessons of history.

Posted by FifthDecade | Report as abusive

“Isn’t this “Double-dip” qualifier just a denial of the inconvenient truth, that we are experiencing an historic de-leveraging which will last a generation?”

Maybe. Driven by the Baby Boom demographics?

Posted by TFF | Report as abusive

Hey Felix and commenters,

How much credence would you put to the theory that the timing of the S&P downgrade was leaked? Can something qualify under SEC rules as insider trading even if we found evidence of S&P employees leaking this info to Wall Street? Insider trading is typically trading on material nonpublic information *about the issuer in question*. That doesn’t quite catch the situation of hearing about a downgrade of US debt and going to short equities instead.


Posted by swyx | Report as abusive

I forgot to mention that I am only raising this to explain the unexplained big fall on Thursday. I am very wary of tinfoil-hat conspiracy theories; but I am equally aware that they are probably not all false.

Posted by swyx | Report as abusive

Why is it a “SELL-OFF” and not a “BUY-UP”?
Which is the glass-half-full view?
Just curious…

Posted by isaiah53-6 | Report as abusive