What started the day as a sideways market turned ugly this afternoon. Starting around noon, SPX started declining and closed at $1890, down $48. SPX didn't close at its low for the day, but it was close. RUT was just as weak, giving up $35 to close at $1010. Trading volume remains high with 3.4 billion shares of the S&P 500 stocks trading. Volume on the NYSE increased 6% and trading on NASDAQ increased 18%. Volatility increased as the market declined, with VIX closing at 25.2%, up almost three points.
RUT is hitting new record lows, having broken the support levels set by the October 2014 correction on Monday and trading even lower today. SPX has not traded downward as aggressively and remains about twenty points above the August flash crash and sixty points above the October 2014 correction.
The most interesting question is "Why"? The financial news networks were interviewing all the gurus this afternoon, asking that very question. The answers were interesting. The most common answer was to blame dropping oil prices. But oil prices have been pretty steady this week, trading around $30. What changed this afternoon? One pundit claimed the markets are predicting a recession, but the last several GDP reports have been languishing around 2% growth for 2015. No one is happy with that, but it isn't negative (economists define a recession as two quarters in succession of negative GDP growth). Let's consider the oil price rationale.
Declining oil prices have traditionally been interpreted as resulting from reduced demand, suggesting lower economic activity. So declining oil prices often signal a slowdown in the economy. That may well be true if we have normal supply market reactions. But OPEC has just opened the spigots even more, flooding the market with oil. Reduced demand decreases prices but increasing supply also reduces prices. Add to this the reports of ISIS selling oil at $10 to fund their activities and we have a market flooded with cheap oil that may be primarily a supply problem, not a demand problem.
There is no question that the global economies are slowing, but none of the major economies are flirting with negative GDP growth. We are still seeing positive GDP growth here in the states; I may complain that it is too low, but it isn't negative.
Then why is the U.S. stock market in the tank?