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Why?
"(Reuters) - Stocks ended their worst quarter since the depths of the 2008 credit crisis, crippled by Europe's debt debacle, a U.S. credit downgrade and a sputtering global economy.
A steep slide on Friday closed out a fifth month of losses . . . .
The S&P 500 index has lost more than 14 percent this quarter and over 7 percent in September alone. As of Thursday, Wall Street's deep downturn in the third quarter wiped out $2.2 trillion of the Wiltshire 5000 index -- the broadest measure of U.S. stocks."
Longer term, stock market performance is impacted in large part by corporate earnings and the level of interest rates. If corporations earn more money, they become more valuable. The more the earnings, generally the higher the stock price.
'Generally' because the level of interest rates is also important. The higher the level of interest rates, the more earnings that are required to raise the stock price. This is because investors have two major markets in which to invest - stock and bond. When interest rates are high, bond market returns look very good on a risk adjusted basis. Corporate earnings must therefore be even higher to compensate for the additional risk taken by purchasing the stock of an operating company.
The inverse is also true. The lower the level of interest rates, the more attractive the stock market becomes as investors become willing to take more risk to obtain higher returns than the bond market will generate.
Currently, corporate earnings are at all time highs and interest rates are at all time lows. One would think that the stock market would be trading at all time highs as a result.
But it isn't.
The stock market is also viewed as a leading indicator - sort of a predictive body that foretells the economic future.
If you believe that, then today's market is predicting bad times ahead. Earnings are high, interest rates are low, but the market is much lower than it used to be when earning were lower and interest rates higher.
If you don't, you are sure the market will go much higher and confirm the historic high earnings/low interest rate relationship.
Get out your coin and flip it. Whatever the result, you will have large numbers of stock market pundits on your side.
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