Stocks careened lowered Thursday morning, with the Dow falling more than 500 points to below 10,900 at its worst. The market has since rebounded a bit — the Dow was recently down nearly 4% to 10,951 — but traders remain on edge and confidence is low (repeat: low) heading into the final 2 hours of trading.
As Henry and I discuss in the accompanying clip, the sharp selloff suggests the rally late last week and Monday was a reprieve rather than the end of the decline. The reality is none of the issues purportedly responsible for the wicked selloff earlier this month — political dysfunction here and in Europe, slowing global growth, banks' exposure to bad debt (and other banks) — have been resolved; arguably, they've gotten worse in recent days.
A number of events have been cited for Thursday's decline, including:
New Worries about Old Europe: European bank stocks plummeted overnight amid reports on unnamed euro zone bank was forced to tap the ECB's lending window for $500 million because it couldn't raise funds from private sources. (In a separate but related story, The WSJ reports U.S. regulators are concerned about funding levels at U.S. units of European banks.)
Loose Lips Sink Ships: ECB council member Ewald Nowotny was quoted saying he fears a Japan-like "long term period of limited economic growth combined with low inflation rates." Meanwhile, Swedish banking official Lars Frisell said "it won't take much for the interbank market to collapse" and suggested banks prepare for such an eventuality. Such concerns help explain the "flight to safety" trade in gold and Treasuries, where the 10-year note briefly traded at a record low below 2% Thursday morning.
That 70's Show: A combination of weaker-than-expected reports on existing home sales and Philadelphia manufacturing plus a spike in the CPI revived fears of "stagflation", a pernicious combination of sluggish growth and rising inflation. The 0.5% monthly rise in CPI was the biggest since June 2009 while the 3.6% year-over-year gain is the highest since Oct 2008.
The Big Give Up: Economists at Goldman Sachs and Morgan Stanley slashed their forecasts for global growth in 2011 and 2012. With the U.S. and euro zone "hovering dangerously close to recession," Morgan cut its outlook for global growth in 2012 to 3.8% from 4.5%. Notably, Morgan said another recession is "not our base case," suggesting it has more room to downgrade if current trends persist.
Similarly, many steadfast bulls are throwing in the towel on bets the worst has passed. Heading into this week, the Investors Intelligence poll showed bulls at 46.2% and bears at 23.7, which is pretty much the opposite of sentiment figures typically seen at a major market bottom.