The past seven trading sessions have been nothing short of remarkable.
Last Thursday, after a couple of weeks of steady but relatively normal declines, the Dow suddenly tanked 500 points. Then, after a modest recovery on Friday, it fell 600 points. Then it soared 400 points. Then it plunged 500 points. Then it blasted off to another 400 point gain. And, today, after another 100+ point gain, it appears poised to end the week down, but within a couple of hundred points from where it started the week.
Is this wild volatility the start of another massive market crash, along the lines of what happened in 2007-2009, or 2000-2002? Or was it just a “correction” — sharp and scary, but now over and done?
No one knows, but Aaron Task and I think the risks are still to the downside. (See video below).
The market’s initial plunge was triggered by the European solvency crisis and the US debt downgrade. The shock of both has worn off, but the fundamental problems have not. Although the US economy is not definitely headed for a double-dip recession, as some pundits were asserting earlier this week, a recession certainly seems possible. And, regardless, the European situation and the US debt-and-deficit problems have no easy fix.
If the US can avoid a recession and the European crisis can be “contained” — a scary word, given the happy theory in 2007 that the subprime collapse would be contained — then the market may well have hit its lows for the year. If that happens, historians will likely attribute the recent plunge to investors adjusting to the country’s slower growth prospects after the recent slowdown — say, 2% a year instead of the 3%-4% economists were once expecting.
If Europe continues to blow up, however, or the US does sink back into recession, there’s almost certainly more downside for the market. The crash of 2007 began just this way, and it lasted far longer and was far more pronounced than most observers expected.
So, enjoy a well-earned weekend and rest up for the week ahead. It seems unlikely to top this one in terms of pure hysteria, but it’s unlikely to be boring.