The stock market had a rough week last week. The overall US stock market declined 6.82% as reflected by the Vanguard Total Stock Market Index Fund(VTSMX).
What were the causes? Here are some of the factors that are thought to have caused the rapid decline:
- The Greek debt crisis?
- Thursday’s half-hour market plunge?
- A very large erroneous sell order?
- Automatic computer generated trading?
- US unemployment rises to 9.9%?
US unemployment rises to 9.9%? Contrasted to the above-mentioned negatives, the US economy has been supplied with a rising tide of positive news like:
- Increasing consumer confidence
- Dropping initial claims for unemployment benefits
- First Quarter GDP growth of 3.2%
- Increased manufacturing, construction and service sector output
- Rising new auto sales
- Increasing personal income and consumption
- Productivity increases
We have been inundated with news of the financial trouble the Greek economy is in. Basically the country is bankrupt, with the Greek government spending more than it is bringing in. The Greek population is hooked on their entitlements,and it is going to be tough to wean them of what they have come to expect as their right. It is estimated that 40% of people employed in Greece have the government as their employer. In the past, when a country cannot pay its debt, they default on their obligations, lenders take a hit and the country devalues its currency. The last option is not open to Greece, because they are a member of the European Union (EU), with the Euro currency. Greece’s economy is only 2% of the EU, so devaluing the Euro is not an option. It also seems that kicking the Greeks out of the EU is not an option, for whatever reason! So the other EU members (principally Germany) and the International Monetary Fund (the US is a large source of funds for the IMF) will probably bail Greece out. Then there are the other European nations that are also deeply in debt (Spain, Portugal, Italy & Ireland) – if Greece is bailed out, who will be next in line for a bailout? Let’s not get too supercilious here in the US. Our Federal and local Governments are also spending more than they are bringing in, so we could follow Europe, if we are not careful. Our best line of defense is to get our politicians to follow fiscally responsible principals. Get out and vote in the New Mexico Primary Election on June 1!Thursday’s Market Plunge?
It is not yet clear what exactly happened to the stock exchanges on Thursday afternoon, but it seems that a trader erroneously entered a few extra zeros to a sell order. So instead of selling 1 million shares of a stock, the order went in as 1 billion shares, or something like that. Normally that would put extreme pressure on the price of the stock in question, but that would be it, until the error was discovered and the trade cancelled. But most trades on Wall Street are now made by computers, and when the programs saw the large sell order and/or drop in price, automated trading kicked-in, and sell orders overwhelmed the markets. A blue chip stock like Proctor and Gamble apparently went down aslow as 1c per share, from a previous $59/share!
We all know the markets are risky. If you look at the graph below, you can see how volatile the market has been since the beginning of 2009.
1Vanguard 500 Index Investor (VFINX) including dividends from Yahoo Finance Historical Prices