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Two Important Questions

This column originally appeared on Real Money Pro at 9:39 a.m. EDT on May 21.

NEW YORK ( Real Money) -- After traveling for most of last week, I wanted to address the two most important questions facing investors and traders:

  1. Why has the market plummeted?
  2. What is the market's outlook?

Neither question is easy to answer, but I will try my best.

By means of background, stocks around the world have just experienced (whether measured in magnitude or persistency of decline) one of the worst three-week periods that many of us can recall in our investment careers.

Again, there are no easy explanations as to what has happened -- there never are (I have consistently written that the investment mosaic is complex and not given to simplicity.)

In many ways, it has been a perfect storm in which a rare combination of circumstances has drastically aggravated the situation: some modest signs of slowing in U.S. and Chinese economic growth, continued political bickering between the Democrats and Republicans (leading to a massive fiscal battle ahead) and, most importantly, fears of a further debt contagion in Europe. JPMorgan Chase's (JPM - Get Report) high-profile gaffe added to the market's uncertainty. And even the Facebook (FB - Get Report) IPO (previously heralded) was seen as robbing Peter to pay Paul, as investors sold other technology stocks such as Apple (AAPL - Get Report) and others to participate in the public offering.

I will try my best to succinctly answer the basic questions of why the market has turned so ugly and whether the current downward spiral will continue. (I could spend thousands of words on these subjects, but I will be brief and attempt to be direct.)

Why Did the Market Plummet?

Europe: Above all, the eroding eurozone has taken a toll on the markets. With the benefit of hindsight, the surprising Greek election (several weeks ago) was the catalyst to the downturn. as fears of a Greek exit from the eurozone have intensified. Investors are now fearful that the debt contagion will spread across Europe.

U.S.: The U.S. economy, though still apparently on track for a muddle-through trajectory of growth, continues to limp along. Several regional ISMs were disappointing (but really not that surprising). Payroll growth remains tepid. Moreover, an uncertain November political outcome, fears of more divisive and partisan leadership (leading to another debt debacle similar to August, 2011) and questions regarding follow-up policy decisions (in an attempt to reduce our burgeoning deficit) haunt investors.

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Chart of I:DJI
DOW 17,813.39 +1.20 0.01%
S&P 500 2,088.87 -0.27 -0.01%
NASDAQ 5,116.1430 +13.3350 0.26%

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