What happened to the stock market?

Question

I am not good at interpreting the stock market ups and downs, and I am a noobie on the economics.

Recently this week, every major news papers and news TVs report that there something bad happened the U.S. stock market, and it is affecting the world.

Can anyone tell me what exactly happen and explain to me in easy way?

I honestly do not know what happened to the stock market, and all I know is it is not a good sign.

Can you also tell me, how bad is it? Is it so bad that it deserves to cover the front page of the news paper?

And what will happen as a consequence of this happening?

Thanks in advance.

Answer 1

In a nutshell the rest of the world is beginning to realize the US economy is not doing as well as advertised.
Case in point in 1975 I was making $5.50 and hour and a home could be had for under $50k in New York City no less. Now 30 years later a lot of individuals are making ~$10 an hour and a home cost upwards of $200K. $1 million in New York City. The only way folks could afford those homes was by extending credit. The banks are also getting what they deserve for their stupidity. How the hell did they expect a guy making $10 an hour to pay a $2,000 per month mortgage.

Gas cost more, food cost more but relative incomes are virtually unchanged. In simple terms your dollar ain't what it used to be. The housing mortgage crunch is the tip of the iceberg. With relative incomes droppng and taking mortgages out of the equation people are using credit just to eat. Well if you're using credit just to eat or buy gas you certainly don't have money to buy a television or anything on a "wish list". Sooner or later that credit will come due. That translates into no sales and no profit for the corporations. Also if you look at Walmart's sales I think folks are even debating about eating. Hence lower stock prices. Another factor is just like a credit crazed consumer the United States is spending money like water without the income to support it(deficit). Therefore the United States as a country is a poor credit risk. Or as I like to say "Just plain poor"
So if I were a foreign investor I would put my money elsewhere. That's what you are looking at now.
Furthermore for at least the last 15 years moreso now the stock prices are all pure speculation. No way can some of those earnings justify the market caps these stock have.
Also by the Fed lowering interest rates may seem like a good idea it's a turnoff for an investor especially foreign. Bad enough the dollar ain't worth nothing but you want to pay even less interest? Screw that and America, Europe here I come.
I bet even rich Americans and Republicans are investing outside the United States. Take a look at where American companies are earning profits. It's not here.

To answer your question in a nutshell it's bad. This situation is unsustainable. Depression is a bad word so they use recession instead. But expect to see some really bad economic news in the next 1 to 3 months and probably years to come. Housing prices I think will tumble big time. It will be a poor Christmas.

Answer 2

It's pretty complex and I'm a noobie too, but I'll try:

The housing markets were stretching themselves thin, with lots of mortgage lenders offering ARM (adjustable-rate mortgages) and other plans for buyers who could barely afford a house. Because of the rising interest rates, and for many ARMs from 2002, now adjusting after their 5-year low rate, many homeowners suddenly found themselves unable to pay their mortgage, and had to foreclose.

When buyers foreclose, this hurts the lenders as well, since many of them have to borrow money to lend money. Suddenly the lenders are in trouble and have to shut down or file for bankruptcy.

In turn, other industries (and foreign markets) who have investments in the lenders are hurt, and begin to pull back, having a shaken confidence. With the creditors pulling back and trying to recoup their loss, many companies were thrust into the limelight to see their risk. Meanwhile, consumers can't borrow even more money and lose confidence in their lenders (i.e., credit cards), so they stop spending to save.

The "ups" of the market have come about by a variety of factors, including the Feds injecting liquidity (money) into the system to break the freeze between borrowers and lenders. Also, today the Federal Reserve cut the discount rate to 5.75% in response to spreading difficulties in credit markets.

The decision means a reduction of half a percentage point in the rate at which commercial banks and other institutions borrow short-term funding directly from the Fed. So with the increase in confidence that the lenders and banks will improve, the borrowers start buying again.

Lot of this is based on speculation on how the market will react, and how our economy will react.... so the reactions are based sometimes on other possible reactions. That makes it difficult to say for sure what will happen, since it will be a prediction of a prediction.

If anyone knew for sure the consequences of our markets, they would be the richest person on the planet.

Answer 3

There was a bubble in home construction, the prices of homes, and the business of making risky loans to people who wanted to buy homes. The homebuilders saturated demand and they have been losing money for a long time. A lot of the hottest real estate markets have had price declines. These events worried stock market investors, but one segment of the economy can do poorly without wrecking the entire economy. When the bubble in risky loans burst, that scared all sectors of the economy, because the whole world is linked through complicated borrowing schemes. If businesses have trouble getting loans their business will slow down, and that threatens every sector of the economy. Major fear led to major selling of stocks.

The newspapers treat this as a calamity because it sells papers, and it is hurting individual investors. But that doesn't make it a bad thing. Bursting bubbles is like lancing boils--it hurts but it leads to a healthier situation. For people who like to buy stocks when they're down, this is great because it's their best buying opportunity in four years.

Answer 4

The credit leash is being shortened. Folks ran because they were scared. Personally I think that money tightening up is a good thing for our over-extended economy, but the main concern is long-term spending will drop. This is a long-term problem with a short term reaction because they just freaked.

Answer 5

The Dow Jones Industrial Average went from 14,000 to 13,000 in 19 days.