Ouch. That hurt! But to my readers, at least, it was expected.
I’m talking about yesterday’s Dow Jones Industrial Average plunge of 416 points — a loss of 3.3%. It was the single biggest one day drop by the Dow since just after the September 11, 2001 terrorist attacks. For the year, the Dow is now down 2%. (And I’m keeping my forecast that big cap stocks like those in the Dow will be down for the year as a whole, as I forecast early in 2007.)
While most of what you read today will blame the previous day’s drop by the Shanghai and Shenzhen 300 Index as precipitating the plunge on North American Exchanges, my perspective is much different. Yes, China’s government did approve a task force to reduce investment speculation. And yes, that caused the main China index to plunge 9% on Monday. But that’s not what caused the pull-back here in America.
Stocks dropped for the many reasons I’ve been writing about over the past few months. Here they are again: The damage to the U.S. housing market is filtering into the huge U.S. economy. and the stock market is finally seeing it. The demand for U.S. dollars by foreigners is declining, which means U.S. interest rates could move higher to attract foreigners back to U.S. dollars. The stock market hates nothing more than rising interest rates.
And finally, we have to acknowledge stocks had become severely overvalued. There’s a lot of “easy money” around and it’s been pushing stock prices to silly high levels. At some point, dumb money gets burned. How many times have I warned about a correction coming in the stock market? Too often. In fact, just yesterday I wrote about how the big U.S. stock brokerage stocks were already moving lower in anticipation of a general decline in stock prices.
Where do we go from here? You are reading a commentary written by an analyst who believes the bear market that started in late 1999 never ended. You are reading the thoughts of an economist who believes the U.S. housing market could fall apart. Sure, an upward rebound in stock prices from this quick and sharp decline is likely. But over the next few months, I expect nothing but lower stock prices.