The stock market has clearly not had a good week. The Dow Jones average was down 5.3%, the S&P 500 was down 8.4%, and it would have been much worse if the markets hadn’t jumped at the end of the day today, allegedly because Tim Geithner will be named Treasury Secretary (which I called, but it wasn’t that gutsy a call). Yesterday the S&P closed at less than half its high of October 2007. For a chart of the carnage, see Calculated Risk (click on the chart for a larger version).
At this point, stock prices are clearly beyond the short-term liquidity crisis that hit financial institutions in September, and deep into recession territory. That is, share prices will not respond particularly sharply to tactical steps such as individual bailout plans, because the big question is how long and how bad the recession will be. The problem this week was not that all the news was bad, but that all the news was worse than expected. The stock market prices in current expectations about the future, so if a report is bad but not as bad as predicted (say, unemployment goes up but less than forecast), the stock market should go up.
- New unemployment claims were higher than expected
- The Consumer Price Index fell more than expected
- The manufacturing survey of the Philadelphia Fed was worse than expected
- The Leading Indicators index of the Conference Board fell more than expected
- Oil futures fell below $50 (indicating that expectations of demand are falling)
Partially as a result, Goldman revised its economic forecast down, saying that the economy will contract at an annual rate of 5% this quarter, 3% next quarter, and 1% the quarter after that, which is worse than any forecast I’ve seen (although I certainly don’t see all of them).
For the stock market to stop falling, new data has to come in that is better than expected. Of course, guessing when that will happen is a fool’s errand.