Making Sense of the Market Drop

This morning I was watching my son, now almost five, finish his first jigsaw puzzle—100 pieces, which taxed his patience never mind his ability to sit still.

Trying to make sense of yesterday’s market plunge, a harrowing 513 drop in the Dow, requires a similar jigsaw-type stamina. Investors are facing a global mix of misery that includes:

Last week’s disappointing Gross Domestic Product (GDP) figure and other weak economic data

The worsening European debt crisis

Worries that the U.S. doesn’t have much left in its toolkit to spur growth

Lingering fears about the U.S. debt debacle

“Everything is piling on,” says Adolfo Laurenti, Deputy Chief Economist at Mesirow Financial. “Investors lack confidence.”

It’s hard to gauge whether this is just a “market correction” (see below), and a short-term setback on the way to recovery—or the start of a double-dip recession.

Meanwhile, the Labor Department report released this morning offered a whiff of optimism: jobs were up, slightly; unemployment figures ticked down. And corporate earnings seem strong. Getting the pieces of this puzzle to form a clear picture is going to take some time.

Stand corrected: What are your thoughts about where the economy is headed, here and abroad?

In Your Corner
There’s no official definition of a correction. It often refers to when an index falls 10% or more in a relatively short period of time. (Yesterday the Dow dropped about 4%; its now more than 10% off from its May high.) Corrections are nerve-wracking, but not uncommon, and often temporary. From 1900 – 2010, a 10% decline in the Dow happened about once a year, according to Capital Research and Management.