What Just Happened?

I've long said that end-of-day market reports are silly, since the only thing reporters can normally say with any confidence is "the market moved and we don't know why". But what we're seeing right now isn't moves so much as fully-fledged earthquakes. Even during a bear market, you don't expect three 700-point down days to come in quick succession like this: if anything, you expect big one-day rallies, followed by more grinding-yet-inexorable decline. The big one-day plunges happen at the top of bull markets, when bubbles burst. But we were already down 35% when the market opened today. Now we're down 42%. Whatever that might be, it sure ain't a bull market.

In any event, I have no idea what happened in the last hour of trading today. I could speculate: maybe it was that story saying that Treasury might start taking equity stakes in banks "within weeks". That might as well be next century as far as this market is concerned: I'm sure I wasn't the only person anticipating a big equity injection into Morgan Stanley this weekend.

It's not just the Morgan Stanley-MUFG deal which is rapidly being overtaken by events, either. It's also Wachovia, whose stock plunged today alongside that of Citigroup and, most worryingly, Wells Fargo (down 15% on the day). The banks with the fortress balance sheets -- the safest of the safe havens -- are looking shaky: Bank of America was down 11%, and JP Morgan got off lightly with a fall of 6.7%. Remember that these are still leveraged institutions: even if their depositors and senior bondholders are safe, their equityholders aren't -- especially not when Hank "$10 is too high a purchase price for Bear Stearns" Paulson is the person in charge of new equity injections.

Was the market's fall a result of the short-selling ban coming to an end? It's possible, I suppose, that the Evil Shorts took a few hours to do their stretches and jog around the track a couple of times before unleashing their full arsenal of weaponry on the market late in the afternoon. But all stocks fell today, not just the financials on the no-shorting list. On the Dow, Wal-Mart was down 5.8%, Kraft was down 7.6%, Johnson & Johnson was down 7.7%: these are defensive stocks for hard times, and they're being decimated.

Or maybe it was just nervousness over tomorrow's Lehman Brothers CDS auction. There's nothing this market hates more than uncertainty, and no one really has a clue what the aftershocks from that are going to be. Were there large financial institutions -- banks, or maybe hedge funds -- which had big net exposures to Lehman, writing lots of protection against it defaulting? If so, tomorrow could be the day when the CDS dominoes start falling. If a major counterparty can't pay up on Lehman and ends up defaulting itself, there's no knowing where it might all end.

But there is a tiny bit of good news: for the first time in many years I'm finally beginning to think that stocks aren't overpriced any more. (Although they're still overpriced in relation to the credit market, which is priced for Armageddon.) As Dean Baker points out, a low stock market is a gift to young workers. If we're saddling them with hundreds of billions of dollars in new liabilities, maybe it's just as well we're gifting them $10 trillion in upside on equities at the same time.

The stock-market plunge is good news for Barack Obama, too. I haven't done the exact calculation, but total US stock-market losses per household over the past year are now approaching the $100,000 level. There's simply no way the incumbent party can win an election in that kind of environment.

One last spooky datapoint: the S&P 500 closed down 666 points from its all-time high. Maybe it's not the terrorists doing the selling, but someone more evil still!

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