Dow Plummets 200 as ... Worries Mount?

By Daniel Indiviglio

If you're a market-watcher, then you know the Dow fell below 10,000 at its open, down 200 points as of around 10:15am. What's driving the drop? Europe's instability? Korea's conflict? General fear of a double dip? Probably all of the above, and more.

As Megan McArdle explained last week, it's always tempting to try to make a big deal out of the stock market dropping a few percent, and explain it away with a chief cause. But it's also generally hack journalism. The stock market is hopelessly complicated, and its moving parts change direction for a variety of reasons. As a result, while single reasons for aggregate changes in a major index may be appealing due to their simplicity, they're also generally incorrect.

The truth is that the Dow could close up a hundred points today. We've entered another period of instability. It's starting to look a lot like mid-2008. If you followed the market back then, you remember the insane volatility that gripped stocks. They could be down 400 early only to end up 300 by day's end. The next day, they'd be down 200 again.

Uncertainty drives volatility, because stock trading becomes a psychological exercise instead of a technical one. If you can't trust the numbers you're using to value equities, then you have to rely on how the back-and-forth swings of the headlines instead. And right now, the euro zone has created an incredible amount of instability, very reminiscent of the U.S. leading up to the financial crisis. Will Greece collapse? How about Spain? Italy? Portugal? Today, there was even a New York Times article that said Britain's debt problems are really the greatest. Will North Korea nuke South Korea? And that doesn't even get into the mixed signals we're getting for the U.S. economy's recovery.

When people ask what they should do with their stocks at a time like this, all you can really do is shrug. Uncertainty, instability, and volatility are the enemies of market, because they make it impossible to even try to understand. If the worst-case scenario happens, and a contagion strikes the entire euro zone, coupled with a war in the Koreas and a double-dip in the U.S., then the Dow will likely touch 8,000 again or worse. If everything turns out to be okay, then it will head towards 11,000 again. The problem is that no one knows. And that's why anyone who wades into the stock market needs to be able to stomach the possibility of a big short-term loss.

This article available online at:

http://www.theatlantic.com/business/archive/2010/05/dow-plummets-200-as-worries-mount/57220/