It was Argentina. It was Israel. It was Enron.
If you made the calls to trading desks on why stocks have gotten hit today, you got a lot of different answers. Worries that got discounted last week as meaningless (Argentina's currency woes wouldn't hurt the U.S.; there was little risk of contagion from Enron's collapse) suddenly came to the fore.
The worst thing about the selloff is how the market reacted to the Purchasing Managers' Index. The key read on manufacturing health showed that business was not as bad in November as economists had thought. Yet the report did nothing to stanch the slide in stocks. To the contrary, after the report's 10 a.m. ET release, the market slid more. Recently the
was off 112 to 9739, and the
was down 24 to 1906.
It's hard to think of anything that traders dislike more than seeing stocks fall on good news. (Laws against selling liquor on Sunday, maybe.) It often means the market has drifted over to the ugly side of bipolar; investors are dwelling on the negatives. It also suggests that stocks already have discounted a ton of good news -- so that when the good news comes out, it's meaningless.
"It was just too easy," Jim Volk, co-director of institutional trading at D.A. Davidson, says of the market's rally. The market had again lost sight of the risk side of the risk/reward equation. The idea that investors had gotten too sanguine about the economy's recovery prospects got scorn heaped on it. The same is true of the Enron debacle -- the received wisdom on Wall Street has been that the effects of the energy trader's fall would be muted, with none of its many creditors taking too onerous a hit.
Japanese investors apparently thought otherwise. Although Japanese banks' total exposure to Enron amounts to less than $1 billion (according to the Japanese government), their stocks sold off sharply on Monday, leading the way in a 3.1% decline in the Nikkei. It was a nice little reminder that Tokyo traders gave their counterparts in New York: Just because everyone thinks something's effect is going to be small doesn't mean that it is.
"Maybe now we have a reason for this correction that we were never going to have," says Volk.
Still, traders reckon, or at least hope, that any further selling won't be too awful. W.R. Hambrecht head of listed trading Todd Clark notes that stocks have merely reached the bottom of a trading range they've been in for the past few weeks. "Hopefully, that will hold," he says.
If it doesn't, many recent buyers will find their positions under water. They may wonder what it is they got themselves into.