Debunking 3 Media-Driven Reasons for this Stock Market Collapse

 

The stock market collapse is now going on six months.

Since peaking at 2,128 in late July, the S&P 500 has nosedived 276 points, or 13%, as of this writing. Stocks teased us in October by regaining nearly all of their August and September losses. But since the calendar flipped to 2016, the market collapse has resumed with unrelenting authority.

When will it end? No one truly knows. Until it does, every Wall Street analyst and CNBC talking head will attempt to apply logical reasons as to why stocks continue to fall—even if this stock market collapse defies all logic. In fact, pundits and talking heads have already been providing plenty of reasons for the collapse.

The three most common are:

1. Oil. Oil has become Wall Street’s most popular scapegoat over the past month or so. It makes some sense. Crude oil prices have dipped below $30 a barrel for the first time since 2002, and have been in a downward spiral for 18 months now. That obviously has put a hole in big-oil companies’ wallets, and knocked the entire energy sector for a loop.

Of course, this narrative doesn’t entirely make sense. Historically, there’s no clear link between oil-price and stock-price movement, including in 2014: from June of that year to March 2015, the S&P 500 was up 10%—all while crude oil prices tumbled from $105 a barrel to $47.

2. The Fed. Fears of what might happen to the economy once the Federal Reserve finally raised interest rates from near-zero have been bubbling for years. In December, Janet Yellen finally pulled the trigger, bumping the federal funds rate up to a range of 0.25% to 0.50%. In the less than two months since, the S&P is down nearly 10%—the stock market collapse many had, for years, feared.

That’s a convenient reason to blame the Fed. But initially, the market reacted favorably to the Fed’s modest rate hike, with stocks advancing 1.7% in the two weeks that followed the long-anticipated December 16 announcement. And because the rate hike had been expected for months—years even—doom-and-gloom investors had already begun selling in preparation for that supposed D-Day.

In other words, the Federal rate hike was already priced into the market.

3. China. Significant slippage in China’s economic growth undoubtedly triggered this market collapse way back in August. Weakness in China spilled into markets across the globe, including here in the U.S. Things haven’t gotten much better for the world’s second-largest economy since, as its GDP growth has slipped below 7% for the first time since 2009.

But here’s the thing: stocks rallied in October and November even as China’s economic woes were worsening. It’s not like China’s financial struggles suddenly resurfaced in investors’ collective memory banks in December and January. China’s problems are ongoing, and are an easy target when U.S. stocks have a bad day.

So, what’s really going on?

Anytime stocks fall as far and for as long as they have since August, it’s common for everyone on Wall Street to find explanations as to why it’s happening. That’s human nature. We fear the unknown, so trying to understand the mechanics behind a stock market collapse is the best way to cope with it.

But the reasons for this collapse aren’t necessarily obvious. China had something to do with how it started. But really, market bears had been looking for any reason to start selling after more than four years of no corrections of 10% or more. China became the perfect scapegoat.

There’s been a domino effect ever since. Investor sentiment turned negative after the August and September selloff. Fears escalated, as evidenced by the rising VIX (Volatility Index). And sluggish earnings have kept investor enthusiasm muted.

Another thing keeping stocks down right now is the chart, according to Crista Huff, chief analyst of the Smart Investing In Turbulent Times advisory.

“From a chartist's point of view, the S&P 500 is testing its September and October lows,” Crista explains. “If the market bounces at those lows and turns upward, then this down market is actually following a predictable pattern.”

Even if it doesn’t bounce off those lows, it’s still too early to panic. As Cabot President and Chief Investing Strategist Tim Lutts likes to say, trends always last longer than you’d expect. Good or bad, they can be difficult to reverse. That was the case when stocks were prospering, rising to record heights from August 2011 to August 2015 with very little interruption. This time a year ago, some analysts thought stocks were so overvalued they were all but pleading for a market collapse.

Last August, the collapse finally arrived. And it’s not a huge surprise that it has lasted this long.  

When will the stock market collapse end?

The good news is, stocks aren’t likely to fall too much longer. I can’t tell you when the market will finally hit bottom. No one can. But no market ever stays down for long. It took only 18 months for investors to start buying again after the 2008-2009 recession—the worst since the Great Depression.

Short of another recession—unlikely given the country’s steady GDP growth and an unemployment rate that’s been sliced in half over the last seven years—there’s no tangible reason why stocks should stay down much longer.

Even if Yahoo Finance and CNBC try to assign a new reason for the stock market collapse every day. 


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