For the last few weeks the U.S. stock market has been a haven of relative calm in global financial markets. Seriously. I know it doesn’t look calm, what with drops (and occasional increases) of 5+% becoming the order of the day. But instead of freezing up like credit markets, the stock market been functioning smoothly as investors assess and reassess the threat posed by the financial crisis. This morning their verdict has been to sell, especially financial stocks, as events over the weekend and this morning in Europe seemed to show that–$700 billion U.S. bailout
bill act or no–there are still a lot of shoes to drop in this great global unwinding of leverage.
Lots of nonfinancial stocks dropped too, presumably on the growing conviction that we are entering into a global recession that will hit everybody’s profits. And so the Dow this morning was back below 10,000 for the first time since 2004.
What makes it all stop? You’ve got me. It could end in some dramatic display of globally coordinated government action. I’m increasingly getting the feeling it’s going to be with a whimper. When everybody gets more or less equally discouraged about the future of financial markets and the economy, we’ll have hit bottom. But we won’t know it at the time, and probably won’t believe it until months after it has happened.