Over the last two years stocks have basically marched in one direction (upward) while companies have slowly started hinting that all is not right on Wall Street or Main St. Increasingly companies continue to pursue buybacks over investing for the future. However, these warning signs have been flashing for at least 12 months so what really happened last week?
Well, it's all about the emerging markets and the Yen. It's really painful to watch the national media grapple with topics like this so they usually boil it down to "hey, what's Apple's stock price?".
I won't bore you with the details but suffice to say that a few things came out of the World Economic Forum in Davos last week that scared the markets.
1) There is grave concern around 5-9 emerging market nations. These issues have been bubbling below the surface for 2 years, but seem to have caught everyone's attention last week.
2) The comments from China and Japan re: the possibility of tensions escalating to war came to light last week. This has always been a <1 a="" an="" as="" big="" business="" card="" china="" class="goog-spellcheck-word" dismiss="" from="" he="" however="" if="" in="" insane.="" nbsp="" obviously="" of="" official="" sort="" span="" style="background: none repeat scroll 0% 0% yellow;" that="" unnamed="" was="" when="" wig="" wild="" you="">Davos1>
) told a crowd that he expected China to conduct a strike against Japan in 2014 the crowd was apparently stunned. The Japanese responded with a few not so subtle comments about the last great war and a Chinese official said he'd be happy to review history with the Japanese Prime Minister. I still think there is <5 anything="" but="" enough="" happening="" it="" of="" p="" people.="" risk="" scare="" to="" was="">
3) The value of the Yen relative to the USD - this is probably the biggest factor no one watches, however, this chart shows why you should pay attention.
(Google won't let me paste the image in here but if you click this link you should see a chart of the USD/JPY & The S&P 500. )
Note how much these two have synched up in recent months. In fact, during a trading day you can watch the exchange rate of the Yen moving the stock market almost instantly. When people say the markets are more at risk today than they were in 2008 it is because of correlations like this.
Last week the Yen broke down a bit and that really sent the market into a tailspin.
*** Finally, a note on my title - yesterday the S. Korean finance ministry said that after stocks fell 3% from all-time highs they would be monitoring the markets and they would be prepared to react if the instability continued.