The Market's Slump: What's Going On?

(UPDATED 4:05 p.m. ET) -- Here's something to chew on: If stocks had fallen today -- and they were down big most of the day before squeezing out a small gain in the closing minutes -- it would have been the longest losing streak in 33 years. 

What's going on?

The correct answer: Who knows? The market is never predictable.

What seems likely, though, is that the recent debt-ceiling charade caused real damage to the economy.

Consider: Consumer confidence in July fell to the lowest level since March 2009 -- a time when the Dow bottomed out in the 6,000s and the economy was losing 700,000 jobs a month. The best explanation for the plunge in confidence is that businesses and consumers stood in shocked disbelief as Washington literally threatened to default on the nation's debt to make a political point.

That fear has real consequences. Businesses that had planned on expanding last month likely shelved projects, opting to wait for more clarity. The focus of corporate boards probably shifted from "What do we need to do to expand?" to "Let's make emergency plans in case the Treasury defaults."

Such a shift in sentiment reverberates quickly. Economic data in recent days has been pitiful -- new orders, factory production, consumer spending? All down. That's likely what's causing so much market misery.

It will be interesting to see whether the recent data is a temporary blip caused by a short-term hunkering down during the debt-ceiling debate, or more of a prolonged shift back toward a recessionary mind-set. My bet's on the former.

What's an investor to do? Don't panic. Turn off CNBC. Maybe do some bargain hunting. This, too, will pass, and the ones who keep their cool will win. That's always how it works.

Fool contributor Morgan Housel doesn't own any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (46) | Recommend This Article (67)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 03, 2011, at 12:27 PM, OrionNebula wrote:

    Brrrinng, brrring, brrring! What's that sound I hear? Is that the phone? What you say? Margin calls?

  • Report this Comment On August 03, 2011, at 1:10 PM, GrumpyOldGuy wrote:

    <<What seems likely, though, is that the recent debt-ceiling charade caused real damage to the economy.>>

    This is a kind of a silly statement. The economy has been slipping since early this year (GDP, jobs, etc) so it seems more likely that the underlying growth just isn't there.

    People aren't stupid, they know things are getting worse and don't like it. They are saving more, planning better, and hunkering down till things improve.

  • Report this Comment On August 03, 2011, at 1:14 PM, MikeMark wrote:

    Wheeeee! (with arms straight up in the air)

  • Report this Comment On August 03, 2011, at 1:20 PM, TMFHousel wrote:

    <<The economy has been slipping since early this year (GDP, jobs, etc) so it seems more likely that the underlying growth just isn't there.>>

    Not particularly. Job growth from Feb-May was one of the strongest 4-month periods of this decade.

  • Report this Comment On August 03, 2011, at 1:27 PM, TMFSpiffyPop wrote:

    I personally wouldn't use a headline that includes "meltdown." This is a losing streak, and a bad run, no question. This is by no means, in my Foolish opinion, a "meltdown." --David

  • Report this Comment On August 03, 2011, at 1:31 PM, oldengineer wrote:

    <<What seems likely, though, is that the recent debt-ceiling charade caused real damage to the economy.>>

    I am also a grumpy old guy but I think that Morgan Housel is correct. Watching the actions of my representatives from Alabama, and their willingness to default on the nation's debt made me very nervous about the future of the economy.

    OE

  • Report this Comment On August 03, 2011, at 1:41 PM, minimumwage wrote:

    All I can say is THANK YOU to everyone selling.

    The market is on sale right now!

  • Report this Comment On August 03, 2011, at 1:41 PM, TMFHousel wrote:

    David,

    You're absolutely right. A change is in order.

    -Morgan

  • Report this Comment On August 03, 2011, at 1:43 PM, Rtrak wrote:

    Why is it that these hopefully 'temporary blips' always happen when I've just bought more shares? Hopefully it is time to do a bit of bargain hunting rather than throwing good money after bad. Amazed at my watchlist today though, with BOOM rising more than 22% on the day so far. good news, I own some, sadly, didn't buy them yesterday!

  • Report this Comment On August 03, 2011, at 1:48 PM, ShrikeTheFoolish wrote:

    Keep up the solid articles Morgan. Still my favorite author on the Fool. It's nice that you take criticism well, such as David's suggestion at removing the word meltdown. Good journalism trumps sensationalism any day.

  • Report this Comment On August 03, 2011, at 2:29 PM, 94hokie wrote:

    How it gets me riled when someone says we would have defaulted on our debt at this point - total lack of understanding of what would have happened and a fool at best, a political shill at worst.

    I was on break at work the other day and someone actually said their mom was FREAKING OUT about not getting her SS check if the deal didn't pass. Really? How people either have their heads so deep in the sand or are total idiots is beyond me. The chances of the US government not making debt payments or covering entitlements *at this point* is about as high as us all out nuclear bombing the entire middle east tomorrow.

  • Report this Comment On August 03, 2011, at 2:33 PM, profbissell wrote:

    when we asked our financial adviser about our accounts, his response was, the goal is not to lose money in your current plan". That is reassuring!

  • Report this Comment On August 03, 2011, at 2:35 PM, TMFHousel wrote:

    ^ Can you elaborate? The Treasury would have been out of cash and lacking the authority to prioritize payments as tax revenue rolls in.

  • Report this Comment On August 03, 2011, at 2:42 PM, mdk0611 wrote:

    What's going on? Pehaps a combination short term issues like the ISM report and the debt ceiling crisis combined with a growing realization that this is just the beginning. The Businessweek cover story on future obligations might have caused a lot of people to wake up and see that the settlement with respect to the debt ceiling barely scratched the surface of the debt issue.

  • Report this Comment On August 03, 2011, at 2:42 PM, benn44 wrote:

    I am probably the only person that prays for a down turn in the market every two or three months. I just love to pay 60% of the value of a stock.

  • Report this Comment On August 03, 2011, at 2:46 PM, TMFBlacknGold wrote:

    Bargain hunters can have a field day today!

  • Report this Comment On August 03, 2011, at 3:01 PM, ShrikeTheFoolish wrote:

    Benn, I'm right there with you. I'm not retiring tomorrow, and absolutely love fear in the market.

    It's like going grocery shopping -- I don't hope for the market to raise their prices before I go.

  • Report this Comment On August 03, 2011, at 3:12 PM, slpmn wrote:

    Awesome to see the irrational exuburance from the Fool bargain hunters. Hope there's enough of you to prop up the market through this downturn!

    Umm, maybe the market is reflecting the impact of pulling hundreds of billions of dollars of government spending out of the economy over the next few years? If there isn't consumer or business spending to take it's place, that's a straight hit to economic growth, isn't it? Right when we were at the cusp of a recession anyway, too.

  • Report this Comment On August 03, 2011, at 3:16 PM, TMFHousel wrote:

    <<Umm, maybe the market is reflecting the impact of pulling hundreds of billions of dollars of government spending out of the economy over the next few years?>>

    Important to note that the cuts don't start until 2013.

  • Report this Comment On August 03, 2011, at 3:29 PM, Okiehound wrote:

    I think those of us who are part of the investment community recognize we & businesses are the current administrations enemy. Obama wants to plunder us "rich" folks to please the plebs. We are smart enough to take defensive positions and business are hunkering down or moving operations to more friendly territory. Pushing further into the crushing black hole of inescapable debt seems to be Obama's and many of the Democrats goal and the debt ceiling crisis was only a speed bump. This economy will suck until 2012 when we get the choice of a slow & painful recovery or to continue the path to destruction.

  • Report this Comment On August 03, 2011, at 3:32 PM, yazzbro wrote:

    Let's really look at what is going on. The economy is just not as healthy as everyone thought. There is little to no growth in most sectors right now. The Debt Ceiling Debacle isn't what caused the downward spiral. The bad earnings a lot of companies are posting is what is causing the downward momentum. Wall Street was expecting good earnings and those numbers are just not there. Also, we may be starting to feel the effects of the end of QE2. The lack of leadership in D.C. has also hindered any kind of Bull Market Momentum. The Double Dip Recession may be underway. If that is true, then Obama can pretty much kiss any hope of reelection good bye. He hasn't addressed the unemployment issues, he hasn't addressed the housing situation, he has been in office for two and half years and still hasn't passed a budget, he played politics with the Debt Ceiling making himself look bad.(The Republicans played the same game too) But Obama looked worse.

    People are just getting fed up. The Middle Class wont spend money because we just don't know what new tax is coming down the pipeline, or if gasoline is going to jump another $1 overnight, or if that loaf of bread or gallon of milk is going to shoot up in cost. The value of our homes are half of what they were 4 years ago. We are not sure if we will even have a job by the end of each day. Just take a look at what is really happening. To blame the Debt Ceiling Debacle for the recent market plunge is just the tip of the iceburg and the Middle class is on the Titanic and we all know the outcome of that story. The Iceburg won and the rest was history. Much like America will be shortly if we don't right the ship. History.

  • Report this Comment On August 03, 2011, at 3:49 PM, slpmn wrote:

    <<Important to note that the cuts don't start until 2013.>>

    2013 or not, that's hundreds of billions that, until very recently, was scheduled to go into the economy. Plus, there are trillions more to come. I'm not even saying the cuts are bad, but how can they not be a factor in the market's recent performance? Six months ago, trillions in government budget cuts were not on the horizon. Now, they're all but locked in. It's not like 2013 is a decade away, either. Over the next 1.5 years, does anyone in this forum see consumer and business spending picking up enough to cover the difference? I don't.

    Very bearish right now. Not selling, though, and at some point, may even join the crazy bargain hunters above...

  • Report this Comment On August 03, 2011, at 4:01 PM, Borbality wrote:

    Have to agree with slpmn. While no one is a fan of Gov spending overall, that's money in the economy that can be created at will that will no longer be coming. Market has to understand this and react accordingly. That's a direct hit to GDP, which this year has already gained at a snail's pace.

  • Report this Comment On August 03, 2011, at 4:21 PM, sidwench wrote:

    I have a nice diversified portfolio, some inheritied - some my own. It has hung in there through multiple generations of political scare tactics used by both parties to rile up the voting public. It has hung in there even with all the customary economic impacts the political scare tactics lug along behind them. I consider my portfolio the calm in the midst of a storm during times like these and a pleasure craft to ride during times of positive outlooks.

    I just hope the next generation produces politicians on all sides that better represent the common interests of constituents rather than taking up oratorical arms to slug it out with each other in a worldwide public forum. And I hope for a new generation of corporate executives that actually consider the part they play in the economic aftermath of these scare tactics. Shame on those that hunker down. You have lobbied and paid political contributions to the politicians that created this mess. You should stand steady against the foul winds you helped create.

  • Report this Comment On August 03, 2011, at 4:30 PM, LyfordJr wrote:

    <i>"What seems likely, though, is that the recent debt-ceiling charade caused real damage to the economy."</i>

    It seems far likelier to me that the debate exposed to people the depth of the debt and spending problems facing the country.

  • Report this Comment On August 03, 2011, at 7:23 PM, GrumpyOldGuy wrote:

    <<Not particularly. Job growth from Feb-May was one of the strongest 4-month periods of this decade.>> TMFHousel

    This is like telling someone they smell pretty good for a person that hasn't bathed in two weeks. Job creation has stalled. GDP has fallen far enough that we are almost in a recession. Do you know when this started?

    There is almost perfect correlation to the passing of Obamacare and almost no correlation to the cat fight over the debt limit.

  • Report this Comment On August 03, 2011, at 7:24 PM, markymaypo49 wrote:

    Don`t forget soon we will have a 17 Trillion dollar debt load!

    If that that won`t slow you down , nothing will.

    Can you spell Greece.

    That is where we are headed.

  • Report this Comment On August 03, 2011, at 7:42 PM, TMFHousel wrote:

    <<Not particularly. Job growth from Feb-May was one of the strongest 4-month periods of this decade.>>

    Should be: "of the last decade," as in 2001-2011.

  • Report this Comment On August 03, 2011, at 8:10 PM, Bert31 wrote:

    "The correct answer: Who knows? The market is never predictable."

    Article should have ended there. The rest is bunk.

  • Report this Comment On August 03, 2011, at 8:27 PM, toobusyboop wrote:

    All of this didn't start with Obamacare, it started when we went to war!

  • Report this Comment On August 03, 2011, at 8:46 PM, Bert31 wrote:

    "What seems likely, though, is that the recent debt-ceiling charade caused real damage to the economy."

    GDP nubmers were revised down drastically for the first two quarters, I think that had more to do with recent plunge then the debt ceiling debate. The market was ready to pop Monday morning before the open then these numbers came out and it plunged. I know because supidly I bought some shares of the SPY pre market.

    Are you blaming the revised numbers for GDP Q1 on the debt ceiling debate? How would that even be possible?

  • Report this Comment On August 03, 2011, at 8:57 PM, TMFHousel wrote:

    No. I don't think any investor should care what the economy did eight months ago. If I had to guess, I'd say the recent selloff was sparked by July's ISM numbers. The more recent data becomes relevant because it impacts next quarter's earnings. In general though we are in agreement: discussions about what moved the market are speculations at best.

  • Report this Comment On August 03, 2011, at 9:03 PM, hbofbyu wrote:

    Here's a thought:

    Transparency in the governemnt isn't all it's cracked up to be. Now the politicians are performing monkey tricks for every constiuent following their twitter account instead of chumming around and making deals with each other. Democrats and Repubs used to be friends once they got to Washington and only played enemies for the press (Orrin Hatch/Ted Kennedy, Ronald Reagn/Tip O'neil). Has technology given us mob rule - albeit civilized mob rule?

    I point to China and Russia as an example (of non-transparency).

  • Report this Comment On August 03, 2011, at 10:37 PM, MichaelDSimms wrote:

    To quote a smarter man than I,

    "Be Greedy when others are fearful and be fearful when others are Greedy".

    If I were a rich man, ta da ta da da da da.

  • Report this Comment On August 03, 2011, at 10:43 PM, Doulk wrote:

    We are heading into something never ventured before so while I do like to think that everything will be ok I feel that some things this go around are different. Older guys will say that there is "always something to panic about but just hold on and everything will correct." While that was my belief for years something has changed that no one has faced before. Not wars, politics, bubbles or scandels. We have conquered all those in the past. The thing that no one has ever sailed through financially is the 14 trillion debt and growing. That fact that this currency is also the reserve currency. The fact that politicians think they can keep kicking the can down the road. This has never been a storm that anyone has experience with. So while I do have my money invested in equities I am not oblivious to the clouds that are gathering.

  • Report this Comment On August 04, 2011, at 5:40 AM, wax wrote:

    Simple I know, but in the end the market is taking a squat. What's the big deal?

    Either folks are invested for the long-term, or they should be in cash earning a 0.65% return.

    Use dollar cost averaging to increase your positions and move on.

    The best advice I can give people is to forget the markets and have a Fresca.

    The markets will be there tomorrow, but the Fresca?

    Wax

  • Report this Comment On August 04, 2011, at 5:52 AM, SailPapillon wrote:

    While we're venturing into "14 trillion debt" waters, it's not as scary as it appears. The US is the sole creator of it's own currency, and the "debt" is, in simplest terms, the sum of all currency every issued. See http://pragcap.com/where-does-the-money-come-from and the comments that follow it. For a balance sheet explanation, see http://neweconomicperspectives.blogspot.com/2010/11/yes-gove.... The problem with 14+ trillion dollars in debt is that the very idea that the "debt" can and should be paid off is wrong. It's not the same as household debt. As to the recent market dive, it's due to the July ISM numbers and June private sector job numbers. The Street is finally catching on to the fact that Main Street is still deeply troubled. Feeling wealthy and being wealthy are different things. The road ahead is unmaintained (and won't be without tax increases). Caveat emptor.

  • Report this Comment On August 04, 2011, at 7:13 AM, jntsrgn wrote:

    The markets and our economy are shaky because our government is run by people who just are not very smart and only dedicated to their own survival.

    Does anyone see the irony of Obama demanding more "stimulus" while blaming the "unfunded wars" and "tax cuts for the rich" for all of our problems.

    Is there any more direct form of stimulus than war and tax cuts?

    The only difference is that Obama wants the stimulus to go to just his cronies for "social justice".

  • Report this Comment On August 04, 2011, at 3:32 PM, Koali wrote:

    In response to many of the comments above, I agree 100%. My question is: What can we do about it? Are we suppose to wait while our economy gets deeper and deeper into trouble? We know that this adminisration does not have a clue and for all we know maybe , and i hope not, it is deliberate. sounds crazy...I know. But I will say, what bothers me, is that Obama is never straight on the subject or empathetic. Makes we wonder about his gfeelings and motives. Frankly, while I like him, I do not trust him at all, especially in light of the company he keeps. I am beginning to think that we citizens may need to start organizing and getting active,. I do not think the government is benign and i think we must act together to save our country. If deals between the Senate and congress just can't be had, is it not possible withone voice that we can force them to make cuts and even define which ones? Have you seen how many new departments have formed and with them all the new handcuffs to the freedoms of businesses. I cannot believe how much is being formed behind the curtain and our watchdog media is non-existant. We have to rely on ourselves and no one else to steer the coutry back to what made it great. We are most definately on a path to destruction. I see it very clearly. We must act now not later. It is imperative. We need to lead ourselves!!!!

  • Report this Comment On August 05, 2011, at 5:26 AM, MichaelDSimms wrote:

    cras est alius dies

  • Report this Comment On August 05, 2011, at 1:24 PM, Bonmotten wrote:

    I would be interested to know what the deficit would be today if

    1. We had not invaded Iraq.

    2. The tax cuts (implemented during a time of war) were never put in place.

    I'm guessing about half.

  • Report this Comment On August 05, 2011, at 7:29 PM, ChrisBern wrote:

    Despite the slump of the past few weeks, the market is overvalued (20.7 PE10 is 26% higher than the historical mean of 16.42). This in the face of significant headwinds and consumer/governmental debt loads and austerity?

    Who would pay 26% higher than the average PE10 for this market? Not me, but I'll continue to short it, that's for sure.

  • Report this Comment On August 05, 2011, at 8:37 PM, Chippy55 wrote:

    Obama, Pelosi and Reid continue to lie and demagogue fallowing the Democratic playbook for the past 50 years just as 100s of them have before (I've heard them all) and the only time they stop lying is when they are thrown out of office, or impeached, or end up not finishing their campaign, (Clinton, Rangel, Weiner, Massa, Edwards) or they get tossed out of their lifes work like those 63 Liberal House Members who listened to delusional Pelosi, the self-absorbed plastic surgery enhanced uber-Liberal, and the lies won't ever stop: that's the nature of the Democrat Party. Barney Frank: Fannie and Freddir are fine (lie). Pelosi: The voters were angry at George Bush, and fired 63 Liberals (delusional lie). Ben Bernanke: Printing money fixes an economy (if that's true, why not start printing money in $1,000 and $10,000 denominations; would that not fix it faster?) Obama is the most clueless, inexperienced, radical, arrogant, narcissistic, ego-maniacal, liar to ever hold the office, and the national nightmare continues until November, 2012 and if the voters in California, New York and Nevada would wake up (they won't, they're liberals) then all of this could have been avoided, i.e., millions of homes lost, 20%underemployment, 45 million on food stamps, trillions of dollars sitting on the sidelines instead of being re-invested in business, and lastly the 4 impeachment trials which will commence later this year, further retarding the recovery.

  • Report this Comment On August 05, 2011, at 9:24 PM, ShrikeTheFoolish wrote:

    Chippy,

    Please stop crying and at least try to sound intelligent.

    Signed,

    Every other normal person

  • Report this Comment On August 05, 2011, at 10:58 PM, wolfman225 wrote:

    <i>^ Can you elaborate? The Treasury would have been out of cash and lacking the authority to prioritize payments as tax revenue rolls in.</i>

    As I have heard it explained from a couple different sources (sorry to come in late), the "IOU's" the government has been putting in the SS "lockbox" are actually a special kind of government bond. By law, these bonds MUST be paid when presented/redeemed.

    One former "insider" also said that, since these bonds were inter-governmental, the redemption of these bonds would have had the effect of reducing, dollar-for-dollar, Federal outlays. This would have enabled the Federal government to turn around and issue new bonds for sale at the same time it used tax revenue to redeem the bonds from SS.

  • Report this Comment On August 10, 2011, at 12:59 PM, bach484 wrote:

    I feel like American investors could pull the economy out of the slump. Some one needs to send out the message to invest in really good American companies that are making solid profits. AAPL, CAT, C type companies instead putting everything in gold.

    Someone needs to shout the message out.

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