The explosive moves in the stock market recently are testing the resolve of investors worldwide, and today there was no relief. The Dow Jones Industrial Average fell 389 points, or 3.2% to 11,781, the Nasdaq fell 3.88% to 2,622, and the S&P 500 fell 3.67% to 1,229.
The market opened lower this morning on concerns out of Italy and whether Prime Minister Silvio Berlusconi would truly resign his post due to his failure to stem the country's debt crisis. As a response, Italian bond yields soared to crisis levels, rising above 7%. Later in the afternoon new details emerged that European officials are reportedly considering an overhaul of the European Union we've come to know. When leaders like German Chancellor Angela Merkel and French President Nicolas Sarkozy express ideas of potentially reorganizing the make-up of the EU, the world must listen closely.
Add it all up, and our market's response today is quite rational, while the world is rather chaotic. The stock market is just trying to keep up with it. Investors may not like it, but anyone that cares about their financial well-being must pay attention to the situation in Europe.
The butterfly effect of global markets
Whether it's kids swapping baseball cards or General Motors (GM) buying a million tons of steel, all trading is based on a common set of rules. Right now Europe has no real set of rules. As a result, German multi-nationals can't do business with other companies because nobody involved knows the rules. With little kids that means a fight and some tears. With GM and Mercedes Benz it means billions and billions of dollars in trades that never happen.
We're seeing the beginnings of a global economic seizure already. Germany is on the cusp of, if not already in a recession. Italy can't issue bonds without paying yields normally reserved for third world nations. Just today Italian bond yields hit crisis levels rising above 7%. None of these things can be stopped without someone stepping in and laying out a plan of action for the European Union.
Without a plan, even a flawed plan, Europe will simply close for business on an International basis. If and when that happens, the whole world will freeze right along with it. The deeper we go into this disruption, the lower corporate earnings throughout the world will be. The lower the profits, the fewer the jobs, until no company on earth can predict with any certainty what their business will look like tomorrow.
The threat of such an outcome is very real and extremely scary. Tens of millions of jobs are at stake. The fate of the financial world as we know it hangs in the balance, and traders are going to bed every night wondering if the head of France will still be in power in the morning.
It's ugly and it's real. Not all fears are irrational. Sometimes there's a monster under the bed and a boogeyman in the closet. This is one of those times.
That's why the market is so volatile and that's why it matters whether you own stocks or not.
- Prime Minister Silvio Berlusconi