The Real Reason the Dow Plunged This Morning

Employment has been a sticking point in the U.S. economic recovery for years, and today it showed its uglier side. With this morning's report from the Bureau of Labor Statistics showing nonfarm payroll growth of just 88,000 jobs -- well short of the 200,000 that economists had expected to see -- fears that consumers will rein in their spending and hurt businesses' profits sent the stock market reeling. Moreover, the fact that the unemployment rate actually fell doesn't necessarily bode well for the employment picture, as it suggests that the troubling trend of disillusioned job-seekers dropping out of the labor force has returned. As of 10:55 a.m. EDT, the Dow Jones Industrials (DJINDICES: ^DJI  ) are down 123 points, or 0.84%, while the S&P 500 is down 0.91% after climbing back from more precipitous drops earlier in the session.

As important as employment is, though, you have to look beyond this morning's report to find the real reason why the Dow fell so much. For more than a year, volatility levels have indicated a complete lack of concern about the mounting problems facing investors around the world. Just a few weeks ago, the S&P Volatility Index (VOLATILITYINDICES: ^VIX  ) , a popular measure of fear levels in the market, dropped to its lowest level since the bull-market days of early 2007. Even with today's gains of more than 8% having pulled the index up 35% from those lows, investors still haven't showed much fear in light of a triple-digit drop for the Dow. If new troubles continue building, any return to even normal fear levels could result in a significant correction.

Looking closely at how various Dow stocks are moving this morning supports that conclusion. Cisco (NASDAQ: CSCO  ) is one of the biggest decliners in the Dow: Networking rival F5 Networks' earnings warning helped pull Cisco's stock down nearly 2%. But lately, one area where investors have been fearful is the tech sector as established companies struggle to adapt to changing conditions. That theme seems set to continue, especially if the broader market stops rising.

On the other hand, Caterpillar (NYSE: CAT  ) has performed fairly well, up 0.25%. Ordinarily, the industrial-machinery giant is highly sensitive to economic worries, making it a poor performer on days like this. But even with no news, the fact that Caterpillar is holding up well suggests a continuing lack of concern about troubling global economic trends.

Continue watching fear levels as a key indicator of what's driving the market. If we see more negative economic data in the near future, a loss of confidence could be what sends stocks to their first major correction in a long time.

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  • Report this Comment On April 05, 2013, at 1:00 PM, GregPrice wrote:

    The relationship between stocks and the real economy is so perverted at this point that I almost assume that ANY rise in the DOW/S&P signals a downgrade in the real economy.

    Captialism (esp in America) has become metastatically cancerous.

  • Report this Comment On April 05, 2013, at 1:52 PM, omckinn1 wrote:

    Just to let you ober-rich boys and girls know the rest of us are not enjoying a great economy. On top of that there are a bunch of people in Washington that do not understand what compassion is all about. Until these situations change good luck with getting richer.

  • Report this Comment On April 05, 2013, at 2:53 PM, ohiodale wrote:

    The stock market is directly related to the e conomy buts only when it come to the profitablility of companies. People invest in corporations to make profits, nothing else. The stock market can still do well even if unemployment is high.

    Anyone in the US can do quite well if they do the right things like work hard and get a good education. Washington is too compassionate. We already hand people money without expecting anything in return. I am for helping people but these people need to have skin in the game. Nothing should be free or without expectations. Handouts create complacency.

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