Four Days of Radical Stock Market Swings Show…

On Monday, the first day of trading after a credit downgrade of US Treasury bonds from Standard and Poors, the Dow Jones Industrial Average dropped 624 points. On Tuesday, it gained 429 points. On Wednesday, it dropped by 509. And on Thursday, it gained 414. It is the first time in its history that the DJIA saw swings of 400 points or more for four consecutive days, swings that far out-strip some of the worst one-day declines in its history.

But perhaps most importantly, Thursday, August 11, 2011, marked the eighth consecutive trading session in which the DJIA changed the direction of its net increase or decrease. The volatility is literally unprecedented, and analysts have been at a loss to explain why. Some say US employment numbers drove the market down, others that they are what pulled the market back up. Some say European banks are “scaring” investors, others that American banks may be less solvent than previously known.

According to Dow Jones, as of Aug 11, 2011:

  • The DJIA has changed directions each day for the past eight sessions.
  • This is the first time in its history, the DJIA has closed with a net change of 400 points or greater for four consecutive days.
  • This is the fourth straight day of 3.5% + moves; the last time this occurred was the four-day period ended November 24, 2008.
  • Second largest point and percent gain this year.
  • An intraday high of 11278.90 occurred at 15:46:44 today, representing an increase of 558.96 points, or 5.21%.
  • An intraday low of 10729.85 occurred at the open today.
  • The DJIA has now had six consecutive days of 400+ point high/low swings (549.05 points today) — The last time this occurred was during the six-day period ended 10/29/2008.
  • Down 3021.22 points, or 21.33% from its record close of 14164.53 on October 9, 2007.
  • Up 7.98% from 52 weeks ago.
  • Up 70.20% from its 12-year closing low of 6547.05 on March 9, 2009.

What may astonish many of the uninitiated is that in just one day, on August 11, “The market capitalization of the DJIA rose $140.8B today.” That means the 30 corporations that comprise the Dow Jones Industrial Average appreciated in value by a total of $140.8 billion, in just a few hours.

What’s more, “All 30 component stocks closed up today; the last session where all 30 stocks traded higher was 08/09/2011.” So, in the midst of this “summer of uncertainty”, every “blue-chip” stock on the DJIA gained in value for two out of the four most volatile trading days in history.

Some have said the reason for the declines was that American businesses are not as competitive; others say Apple’s new position as the nation’s most valuable corporation has buoyed stocks in general, showing that innovation and consumer products can restore economic growth. Some say markets are worried about government policy; others say it is the Fed’s unprecedented decision to set interest rates as near zero for at least two years that has allowed a rebound to occur.

Nevertheless, over the eight sessions in which the DJIA has swung back and forth each day, the overall decline has been 986 points or 8.1%. Since July 22, when concerns that the US would default on its debt actually became credible, as Republicans walked out of talks, the decline has been 1,581 points, or 12.4%.

Why is that important? It is important, because it actually gives us a real and relevant marker of enough significance to explain why the market has seen some of the most intense volatility it has ever seen. It began to become clear, on the 22nd of July, that Republicans in the US House of Representatives were not willing to make a “grand bargain” to reduce the American budget deficit by $4 trillion over 10 years, because they had vowed not to raise taxes.

Markets responded by declining steadily. In fact, between July 22 and August 3, the DJIA declined steadily every single day, as the US debt crisis came to a head. Then, on August 4, began the daily reversals that have puzzled so many investors, analysts and policy makers. And there is good reason for this period of intense confusion: US Treasury bonds, the value of which was called into question by the debt-ceiling crisis, underpin the entire global financial system.

August 2011 has posed grave and unanswerable questions to the worldwide financial sector: What would happen if the US defaulted on its debt? What would happen if the most stable financial investment in the world suddenly saw its credit rating downgraded? More confusing still: what if only one agency downgraded it, while the rest disagreed with what are patently unsound calculations by that one agency?

What will happen to the American economy if Texas experiences its fifth energy emergency of the year, while Dallas endures 40 consecutive days of 100ºF heat and the state begins importing electricity from Mexico? What if austerity measures—deep cuts in government spending—in Europe and the US begin to impede economic growth and destabilize major consumer economies?

This period of intense volatility is attributable to a lot of economic challenges, but mainly to the unprecedented confusion over whether the US government will work across party lines to support its long-term debt obligations. That policy logjam has very savvy investors, some of the world’s best, confused as to how best to judge the long-term value of not just US Treasury bonds, but thousands of different kinds of investments.

The relentless inflexibility of anti-tax radicals in the House of Representatives has destabilized the world financial system, in that it has injected irrationality into the management of the most rational, stable, form of financial investment and called into question. The world’s major industrial economies are facing unprecedented coordinated pressures, with food prices and cost of living rising in China, and Europe and the US experiencing massive employment crises and declining overall wages.

While Pres. Obama’s economic stewardship has coincided with the DJIA having gained “70.20% from its 12-year closing low of 6547.05 on March 9, 2009″, he has not had a cooperative opposition, and the steady—if gradual—recovery is seen as being in doubt by many investors. Yet Warren Buffett, thought by many to be the world’s most successful, steady and reliable investor, has said the entire debate is off the mark, that he would give US Treasury bonds a AAAA rating, if one existed.

So, four days of radical stock market swings—eight days of unprecedented back-and-forthing—show… very little with clarity. More than half of all trades are now computerized, following pattern-based programs for investment, which means the markets are not necessarily “commenting” on economic reality, so much as they are being driven by machines trying to maximize returns, given the moment to moment activity of other traders.

Whatever the underlying dynamic, it will surely play out as ripple effects of uncertainty that have very certain impacts, jogging or slowing credit markets and undermining the ability of home-buyers to fund new purchases or new construction. Indeed, in what may be a story of massive overriding significance, 60 Minutes this week began to report on what may yet be the most important economic trend of the year: how banks’ insistence on foreclosure as a tool for optimizing their home-loan ROI might be dragging the housing sector down.