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.