Review & Outlook

Our take on the investing, financial, & economic themes of the day

Reviewing Yesterday’s Selloff

5 August, 2011 by Ben O'Brien in Commentary

Following the 500 point drop on Thursday August 4, we spent that evening reviewing data and literature to understand the selloff. There was not one single catalyst—the U.S. Economy is barely growing, the federal government is preparing to slash spending, and there is a growing crisis in Italy.

Yesterday’s action was a global correction.  Oil sank 5.8%.  Two year treasuries are at a record low.  The market is down 11% since July 22.  The S&P is at 13.2 x earnings, the cheapest level since the bull market began.

The simplest answer is that the odds of a double dip recession have increased and the market responded accordingly.   The U.S. press tends to be focused on the impact of cost cutting in the Debt Ceiling deal.  The European press is focused on the emergency Brussels summit on July 21, which approved a further bailout for Greece—but seemed to create problems for Spain and Italy.  (Not knowing what to blame—the media in both regions seemed to turn to the most recent big news story to search for an explanation.)

On a brighter note:  The jobs report this morning was better than expected.  Economists were looking for 85,000 new jobs, and the actual number (117,000 new jobs) was better.  Unemployment dipped to 9.1%.