Stock Decline: It's Not Just About Greece

Posted by: Ben Steverman on May 6, 2010

As the Dow Jones industrial average plunged 9.2% today — the biggest intraday decline since Oct. 19, 1987 — cable news channels were showing protests in Athens. The video gave the impression that the stock decline and the Greek fiscal crisis were directly linked.

Not so fast. Many suspect there was some technical problem that spooked the markets and sent stocks diving, then dramatically rebounding this afternoon.

“We’re due for a correction, but nothing of this magnitude,” says Gary Wolfer, chief economist at Univest Wealth Management. “What occurred here is unfathomable and it must have been some technical problem.”

[UPDATE: Indeed, Bloomberg News is reporting that a NYSE Euronext spokesman says “there were a number of erroneous trades” during the market’s steep drop.]

But even if there wasn’t, U.S. investors have reasons other than Greece to be skittish and so ready to sell. At its peak this year, the stock market “was very fully valued,” says Jerry Webman, chief economist at OppenheimerFunds. Stocks were priced to reflect an optimistic scenario. Investors know, Webman says, that “when people have underestimated bad news in the past, they got socked in the stomach.”

Indeed, stocks have been on the decline for two week. Even before today, the S&P 500 was down 7.3% since Apr. 23. Greece’s woes aren’t enough to be the only driving force behind this big market correction.

“Greece is not such a big share of the global economy to justify the concern,” says Michele Gambera, head of quantitative analysis at UBS Global Asset Management. Instead Greece is one contributor to a lot of uncertainty in fixed income markets. In the last year, Gambera says, there was a “dash for trash,” as investors bought up riskier assets in anticipation of a worldwide economic recovery.

“Maybe we are having a pause here, an assessment of [whether] we’ve gone too far into risky assets,” Gambera says.

By the logic of some market bulls, the Greek and European problems are just that — European problems. “The Euro problems are the Euro problems,” Wolfer says. Even if it spreads from Greece to other debt-ridden European nations, trouble in Europe might push more assets toward the safe haven of U.S. government debt. That could help stimulate the U.S. economy by keeping U.S. interest rates lower for longer.

Once bullish investors realized the stock market was crashing, they jumped in and started buying again. These are not the gloomy days of Fall 2008 or March 2009, when investors were so depressed that almost no one was buying stocks.

The danger, as always, is that market panic spreads, creating more market panic and spreading further. Fear creates fear. That’s how the 2008 financial crisis happened. Luckily, the vast majority of investors don’t yet believe Greece’s problems warrant that level of concern.

Reader Comments

RobD

May 6, 2010 6:41 PM

I beg to differ, these are gloomy days indeed. This kind of wild volatility is a clear sign that fundamentally things are not well. Greece is simply a canary in the coal mine. The severe crisis of 09 has simply been "papered over" with tons of liquidity. NOTHING has been done to address the core of the problem, there is simply too much debt, including the US (conveniently the business press doesn't like to talk much about US debt for this fiscal year). So when one of the weaker links in the system starts to show signs of fatigue the whole system goes into panic mode. Let's just hope the FED's efforts to re-inflate the bubble will succeed in stabilizing the system until the REAL problems can be addressed.

FriendsofIndia

May 6, 2010 9:28 PM


Clearly, clearly, like Greece you are panicking. But, there is no need of that, no worry at all. PIIGS, Bordelo, King Arthur, Old Prussia, all, come to sugar daddy, India; we are willing to rush to your help! India shines while the world declines. Our prime minister has already pledged $300Billion US dollars of aid, virtually every single drop of dollars in our coffers. All we need is a few collection of the medieval castles on the Rhine and the Thames equipped with the splendors of the ancient shining armor that stands no chance of a Hindi snake pipe warrior. Or better yet, sell the Crown to us for a song, that is, an Internet song. And also throw in the Olympia, RR, and just like our Jag. Our saved 5 rupee meals will be splendid enough to fully rescue you after multiplying them by 1.2 billion. This is because India is the world's only super power and its greatest democracy. Like your Russian neighbour, you have no real democracy, at least not the many thousands of flavors of our curries. With Indian democracy, nobody needs to worry, it's sunshine everyday, everything can be overcome, and nothing cannot be achieved. Pray for India, beg India, bow to our super powers. Jai Hind!

Carl

May 6, 2010 11:33 PM

Yes, yes, yes too much debts, don't blame the computer nor Greece. It is simply too many countries own too much debts. After England, US, then Greece who is next Spain or Portugal? Is there a wolf packs that will take this opportunities?

Lauren R

May 7, 2010 4:52 AM

With 25 million Americans unemployed, and no hope for the future, thanks to the influx of foreign workers from India, there really is no hope until the Department of Labor steps up and smells the coffee.

carlos

May 7, 2010 6:14 AM

a lot of stocks are starting to trend down. either stay away or go short.

Gary

May 7, 2010 8:01 AM

Stock markets have always thrived from the money put in to them by the small investor. The problem stock markets face is that the small investor is tired of losing their money due to financial schemes and are keeping their money on the sidelines until the stock markets can prove they are trustworthy again. The big investors don't want to to play the game with their own money and are waiting for the small investor(suckers) to put their money back in, so they can screw them out of it again. The stock decline is really about a loss of trust. Stock markets around the world need to get serious about restoring it.

Stone

May 7, 2010 8:30 AM

The market is psychological with large swings because of fear and other factors, but it will swing on either side of fundamentals and technicals. If it gets too far out of wack from this center THAT is the time to buy.

investor

May 7, 2010 8:37 AM

not so - our economy is improving, numbers are strong, and we have no need to panic. Lots has been done to address the problem.

JesseD

May 7, 2010 9:00 AM

RobD, I completely agree with your assessment. One question though, wouldn't "re-inflating the bubble" just increase the size of the next crisis. My gut feeling is that the longer we delay addressing and changing the real structural problems (too much debt and banks that are so large government can't void the implied guaranty), the bigger the problem gets. We've been avoiding the issue for almost 30 years now. We had a great opportunity/call to action after the 2009 crisis. If we don't fix it now, who knows how bad the next one will be.

BrianV

May 7, 2010 9:20 AM

I agree with RobD. Way too much debt around the world. There can't be too much appetite left for it, especially when the underlying data indicates the economies supporting the debt are in trouble. Not to mention the huge run ups in government spending, especially in the U.S. Greece is just the next "bird" to drop. Iceland went down with the mortgage failure. Greece is indicative of where the U.S. is headed if it doesn't get government under control.

TomK

May 7, 2010 10:29 AM

Talking about BUBBLE - Indeed the BUBBLE is in China with most stocks having HIGH P/E ratios. US stocks are not that inflated.

Wayne

May 7, 2010 10:50 AM

Great point, I was wondering when we would have a slight correction because it seems we have been moving up constantly since the DOW hit 10K, but I never expected this type of slide in one day. There are some uncertainties out there that we need to figure, but I remain bullish at this point.

Steve

May 10, 2010 8:41 PM

Generalities state when you buy a ten % down market and sell a %5 up, you make 15% in TWO days. The Hedge Funds made a fortune. And so did their managers. Mere circumstance does not allow fluctuations of this nature. This is the "rich" stealing from the poor. Contrived, manipulated and controlled. Computer glitch my ass.

Radu Prisacaru

May 12, 2010 5:27 AM

After searching for this information, I will have to say most people agree with you on this topic. But I have another opinion, see it in my blog.

underestimated

May 20, 2010 1:03 PM

The problem is that politicians around the world have made promises that could never be kept to assure their stay in power. The Ponzi scheme is imploding and citizens are demanding promises to be kept that just can't be kept. All trust is gone in government and in the business stucture too as business was forced into bed with the politicians to survive. It's very hard to believe anything politicians or CEO's have to say. We can handle the truth but can the powers that are in "control" handle it. What a tangled web!

Sandman

June 15, 2010 7:03 AM

What happened was a true market crash, not a "flash crash", a "fat finger" or anything else. The bottom line is that for a brief time there were no bids, and the proper price at such a time is zero. That's why the regulators were unable to come up with a particular reason for the crash. The reason is the same as it was in 1987 and 1929 (no bids), but they can't say that. "Circuit breakers" for individual stocks or the whole market aren't the answer and may actually make things worse. When people realize they can't get their money out, that may cause more selling. Bottom line is the can has been kicked down the road for 50 years with bail-out after bail-out & the chickens are coming home to roost. You can only delay a market clearing event, but can not prevent it. By delaying it you only make things worse. Lance the boil & get the pus out.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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