Stocks Drop Sharply: Reality Bites

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The Dow Jones Industrial Average fell 268 points on Thursday as investors took full stock of the troubled world. The weaker members of the European Union are in financial crisis and talk of defaults fills the air. The fiscal problems and the stock market’s weakness don’t surprise me, but I must admit that this is coming earlier than many—including me— had expected.

My belief has been that the stock market would weaken in early spring as investors, large and small, got a full whiff of the economic weakness awaiting us in the second half of the year. The stock market is a discounting mechanism and, the thinking goes, would have discounted the earnings disappointments well before they appeared. In all that wisdom, here’s the forgotten truth: The market discounts the future efficiently but rarely on schedule–and we are reminded of that this week.

What should have signaled this correction is the fact that many in the financial community (and I include business journalists in that crowd) had signed on to a scenario of party-now-pay-later, figuring that the economic stimulus would fuel economic growth at least for a few quarters. But even though the fourth quarter GDP was a surprisingly good 5.7%, it didn’t really impress people as credible. What has impressed them is our ballooning deficit and a deep suspicion that our economic growth is a product of federal borrowing and therefore unsustainable. All it took was a few Euro jitters to bring all these concerns front and center in the stock market.

America’s financial crisis has passed, but we are not yet through with our economic crisis. That means the investors’ seas will remain rough for some time.