What's Spooking the Market?

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As a Foolish geezer, I've been a student of the market since, with my college diploma still drying, finagling a job in Gotham as a trader with the old-line investment banking firm of Kidder Peabody & Co. In the intervening years, I've rarely seen a market as prone to nosedives as the current version.

Why, exactly, are our equities indices in such a lather? The answer ranges from issues like earnings disappointments to mounting concerns about our economy. But it seems to me that four key factors outweigh all others in creating the drubbing of the market since last summer.

Energy prices
I write frequently about energy subjects, but that's not the reason I've placed energy prices first on the list of factors sapping the market. Nevertheless, crude prices did essentially double in 2007, and this year has provided no relief. In that context, I wish I had a dollar for every market seer who's appeared on CNBC with the observation that crude prices don't yet appear to have wounded the economy.

Baloney! As most Fools know, consumers make up about two-thirds of economic activity, and more than a handful of those folks essentially exist from paycheck to paycheck. A jump in their energy prices, while benefiting ExxonMobil (NYSE: XOM) and Devon (NYSE: DVN), for instance, creates a tremendous drag on their overall spending. The result frequently isn't pretty for U.S.-based companies -- a result we've observed in the past couple of earnings seasons.

I guess I'm most surprised that, with crude oil prices having levitated above $100, our nation is effectively devoid of an energy policy.  We have a president -- a somewhat distant cousin of mine, I must admit -- who can strap on a Texas twang that'd put LBJ or John Nance Garner to shame, but we're still without a sensible approach to this critical area.

Housing
"Experts" intent on downplaying the role of housing in softening the economy delight in quoting the relatively skinny percentage of homeowners who've fallen into payment arrears. But that's not really the point. As The Wall Street Journal reported this week, a new study maintains that mortgage losses ultimately could result in a $2 trillion reduction in banks' loans and other assets, which in turn might slash 1 to 1.5 percentage points off our economic growth. 

And despite the recent improvements in the share prices of the likes of Lennar (NYSE: LEN), Ryland (NYSE: RYL), and Pulte (NYSE: PHM), housing -- especially as it relates to its financing aspect -- remains chaotic. Which takes us back to that all-important consumer: The reverse wealth effect that consumers feel as their home values slide is teaming up with energy costs to weigh heavily on spending, the economy, and, ultimately, the market.

The dollar
The dollar's freefall may have benefited the global sales of U.S. companies, but it's done nothing to keep commodities prices -- and consequently overall inflation -- in check. But as the Fed has maneuvered to reduce interest rates and consequently boost both the economy and the equities markets, the dollar has been tamped down steadily.

Unfortunately, for a nation that imports about three of every four barrels of oil it uses, rising crude prices and a declining dollar tend to feed on one another: As crude prices elevate, so does our trade deficit, tending to put pressure on the dollar's relative value. And conversely, since oil is denominated in dollars, a lower dollar tends to raise the price of crude. It's a vicious circle that tends to rattle the markets.

The political scene
This will be an economic comment and not a political one. Nevertheless, I'm convinced that, especially amidst an already faltering economy, the markets are severely frightened by presidential primary rhetoric promising a shackling of major corporations or the institution of programs that clearly would involve the imposition of far higher taxes. 'Nuff said on this subject.

Conclusion
While I don't want to lapse into one of my frequent Foolish roles as Chicken Little, my difficulty with these causal factors in the market's recent retreat involves their relative permanence. Crude prices are unlikely to fall too far or for too long, the dollar has been losing ground for half a dozen years, and while housing will recover eventually, I'm afraid that the recovery may not begin in earnest until 2009. Your guess is as good as mine how the election will eventuate.

The key, then, is to buy specific equities for specific reasons. Rather than buying baskets of stocks that may have done well in the past, Fools would be well-advised to home in on companies that likely will perform well even during a U.S. recession. My favorites these days include agricultural stocks, like Monsanto (NYSE: MON), or members of the mining and minerals group, such as copper producer Freeport McMoRan (NYSE: FCX). It's hard to imagine the global economy falling far enough to derail either of these thriving entities.

For related Foolishness:

• The Mother of all Mergers, Part 2?
• Mosaic Fertilizes Profits
• Housing's Horrible Hiatus