Stock Market Decline: Goodbye Optimism, Hello Reality

Wow. It’s the end of the first week of August, and shouldn’t we be fretting about whether the Cleveland Indians can hang in there and make it to the MLB playoffs in November or December? Instead, the stock market during the past week or so has confirmed what most outside the Beltway have known for months: the economy bites, there ain’t no job creation (except for GE in China), and if you own a house and need or want to sell it, well, good luck and God bless.

Goodbye optimism. Hello reality.

And I’m not going to pretend that I understand why the stock market tanked yesterday. There are plenty of smart people out there who do that for  a living. Most can’t time or predict the market any better than the rest of us.

Anyway, here’s a perspective on yesterday’s financial debacle from Mohamed A. El-Erian, opining on a CNBC blog. This guy heads Pimco, and makes his living by making the right calls on the economy.

Technical factors played a role in Thursday’s unsettling market moves, including the disorderly across-the-board collapse in the price of risk assets in the final hour of trading and the related surge in U.S. Treasurys. But they were not the cause. Rather, they amplified three factors that will determine the fate of markets in the weeks ahead.

First, it is now undeniable that the U.S. economy is weakening across the board — a phenomenon aggravated by a concurrent slowdown elsewhere in the world.

Obviously, this translates into lower corporate earnings and profits. It also put pressures on the unfortunate households already burdened by un- and under-employment, excessive debt, and upside down mortgages.

And more:

We should not underestimate the markets’ ability to recover if, for once, policymakers were to surprise on the upside. After all, there is lots of cash on the sidelines and most large companies (particularly multinationals) have impressive rock-solid balance sheets.

If, however, policymakers continue to disappoint, markets are staring at the regrettable prospects over the next few weeks of continued volatility and further losses.

Gee. “If policymakers continue to disappoint.”

Goodbye optimism. Hello reality.

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