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The Real Reason the Dow Plunged This Morning

By Dan Caplinger - Apr 5, 2013 at 11:03AM

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When complacency gives way to fear, stocks can drop precipitously.

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 (^DJI 0.15%) 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 (^VIX 0.24%), 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 (CSCO 0.97%) 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 (CAT 0.73%) 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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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$31,928.62 (0.15%) $48.38
Caterpillar Inc. Stock Quote
Caterpillar Inc.
$205.65 (0.73%) $1.50
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$43.77 (0.97%) $0.42
CBOE S&P 500 Volatility Index Stock Quote
CBOE S&P 500 Volatility Index
$29.52 (0.24%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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