The Market’s 6.66% Plunge: The Devil Is in the Details

The stock market plunged again today and the numbers are mind-boggling. The S&P 500 lost 79.92 points to close at 1,119.46. That’s a loss of 6.66% which is the biggest one-day loss since 2008. It also eerily evokes the market’s March 2009 bottom of 666. Today clocks in as the 25th-worst one-day loss for the market since 1932 (that’s as far as my records go back). For the first time in 15 years, every single stock in the S&P 500 lost money today. If you’re scoring at home, that’s Bears 500, Bulls 0.

The S&P 500 first closed at this level on April 2, 1998 which was more than 13 years ago. As badly as the S&P 500 performed, the Nasdaq did even worse. That index lost 174.72 points today to close at 2,357.69. Down volume led Up volume by a ratio of 151-to-1. The $VIX jumped exactly 50% today—from 32 to 48. It’s tripled in a matter of days.

Once again, the cyclicals bore the brunt of the loss. I know I must sound like a broken record, but this is very important in understanding what’s going on. The Morgan Stanley Cyclical Index (^CYC) dropped 81.22 points today to close at 820.64. That’s a loss of 9.01%. Today was the 17th time in the last 18 sessions that the CYC has trailed the overall market. (Read that sentence again for full effect.)

What happened today is that cyclical stocks and small stocks (which tend to be disproportionately cyclical) did especially poorly. The larger stocks did better, meaning somewhat less terribly. The Dow, for example, “only” lost 634.76 points or 5.55%. That’s more than 1.1% better than the S&P 500. The Russell 2000 ($RUT), which is a small-cap index, lost 8.91% today. Only three months ago, that index was at an all-time high.

Among the S&P 500 Sectors today, the Financials did the worst, dropping 9.98%. Bank of America ($BAC) was down more than 20%. The bank faces many significant challenges, not the least of which is that they suck. After the Financials, the Energy Sector was the second-biggest loser with a loss of 8.27%. Then another cyclical group, Materials, lost 7.28%. The Industrials came in fourth-worst with a loss of 6.87%.

The top-performing group was, not surprisingly, Consumer Staples which lost 3.87%. Next was Healthcare which lost 5.25%. The Healthcare and Staples sectors often track each other. This makes sense since these are areas that will be least-impacted by an economic slowdown. Folks generally don’t cut back on their medical needs or food during a recession, at least not like they do with non-staples.

Here’s what’s happening: The S&P downgrade of the U.S. isn’t so much impacting Treasury yields. Those are as popular as ever. Instead, what we’re seeing is the impact on everything else. For example, the downgrade is leading investors to think that the government won’t rely as heavily on fiscal policy to get the economy moving again. That implies that there will be more monetary accommodation from the Federal Reserve which means low rates for a longer time.

As I’ve written before, buying gold is the equivalent of shorting real short-term T-bills. As a result, gold continues to soar. The element broke $1,700 today, and in after-hours trading, gold got as high as $1,723.40.

I’m at a loss to comment on the stocks on the Buy List. Except for Ford ($F), I like them all. At this price, Ford isn’t looking so bad either. There hasn’t been one single bit of information that’s come out in the last two weeks that could possible make anyone change their mind on any of the Buy List stocks. The earnings reports were very good, and a few stocks raised their full-year ranges.

This year highlights an important fact about investing: The stock market is not symmetrical and it’s subject to “fat tails.” I’ll explain that again but this time in English. The stock market has a tendency to rise slowly and fall back sharply. Bull markets are long and boring. Bear markets are quick and deadly. In fact, most of the debate about a bear market comes after the low. It moves so fast that folks don’t realize its over.

By “fat tails,” I mean that the market builds on its own momentum. People start selling because everyone else is selling. That, in turn, causes even more selling. As a result, these awful market days tend to pile on top of each other. Consider that the three worst days of the past year have come in the past week.

The lesson from this is that we don’t know when the market’s downward momentum will end. Since it builds on itself, it’s like it has become its own monster. The selling will stop, but I have no idea when. These bottoms are often a process. Sometime, like in 2009, it’s a sharp bounce off the bottom. But even that came a few months after the most dramatic news of September 2008.

In economics, there a division between the financial economy, which is the stuff we mostly talk about here (crazy traders in New York and London moving massive amounts of colored paper around) and the real economy (real people buying and producing real things). These two economies have a troubled relationship, and they don’t always move together. The problem is that problems in one can easily tip over into the other.

In 1987, the stock market tanked, but if you looked at broader economic data from that time, you’d hardly know anything went wrong. In 2000, the markets soared above and beyond anything that was happening in reality. What we’ve seen over the past few days is a panic of the financial economy. As of now, we haven’t seen conclusive evidence that the real economy is in recession. I don’t mean it won’t happen, but as of now, the solid evidence isn’t there. What we do have is bits and pieces that the economy is slowing down.

Until there’s more evidence that the economy is headed back in the basement, I continue to like stocks a lot. Bond yields are very low and stock valuations are cheap. This panic will pass.

Posted by on August 8th, 2011 at 10:21 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.