What's the cause of today's market drop--Obama's re-election or chaos in Greece ahead of the austerity vote in Parliament?

11/07/2012 1:44 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Deciding why the stock market did this or that on any particular day is demanded of journalists and analysts. But it’s usually an exercise in “magical thinking.” Yes, this or that occurred at the same time as the market moved this way or that. But was it the cause of the market’s move or merely coincident in time?

Today is one of those days when we’ve got a big stock market move in the United States—the Dow Jones Industrial Average is down 2.25% or nearly 300-points at 1 p.m. New York time—and two big potentially market-moving events.

First, there’s the possibility that Wall Street traders are selling because of Barack Obama won re-election last night as President. The logic here goes that the selling is a reaction to fears that an Obama victory raises the odds of partisan gridlock over the U.S. budget and the Bush tax cuts. Over the fiscal cliff we go in January. Yesterday the consensus Obama victory trade on Wall Street recommended buying Treasuries, hedging with gold, and selling stocks. For today stocks are down and Treasuries are up. Gold, however, is down.

Second, there’s the possibility that the U.S. market—along with European stock exchanges--are selling off because 80,000 people are rallying in Syntagma Square in Athens to protest the latest Greek austerity package. A small number of protestors tried to storm Parliament. Police used water cannon, stun guns, and tear gas. Those protestors threw Molotov cocktails. All this as the Greek parliament prepared for the first of two votes on the austerity package. Today’s vote, on the labor market “reforms” in the package, is expected to be tougher than Sunday’s vote on the budget itself. Government ministers are predicting that the austerity package will pass tonight but by the thinnest of margins. If the measure fails, then there’s no chance that Greece would win approval of the desperately needed next 31 billion euro payout at the November 12 meeting of EuroZone finance ministers. Without that cash the Greek government will run out of money sometime in the next two to three weeks and the Greek banking system could stop functioning. All that makes traders and investors nervous. The German DAX stock in index is down 1.96%, the French CAC 40 is down 1.99%, and the Spanish IBEX 35 is down 2.26%.

So what is the explanation for today’s market tumble?

It doesn’t have to be one or the other, of course, and there’s no doubt that the combination is pretty negative stuff.

But it is worth trying to tease apart the two explanations because they imply such different things about how long any retreat might last.

If this is mostly about Greece and Europe, the decline would be tempered by a successful parliamentary vote on the austerity package tonight in Athens and then could well turn into a rebound if European leaders do something reasonable (which could be short of actual approval) about new funding for Greece on November 12. In other words if the big problem right now is the Greek/Euro debt crisis, we’ll know by watching the markets over the next few days.

If, on the other hand, this is mostly about a second term for President Obama and fear of the fiscal cliff, I wouldn’t expect the market to reverse direction within the course of a few days. The buy Treasuries/sell stocks trade could well go on until we hear sufficiently positive and conciliatory talk out of Washington (which could take a while—or forever) and prices for Treasuries and stocks move to levels that make reversing this trade attractive enough to overcome fear of the fiscal cliff (for the moment.)

I don’t know of a reliable way to decide between these two potential causal explanations except to wait for events in the run up to November 12 to show that today’s drop is or isn’t mostly a result of worries about Greece and the euro.

I’d save any big portfolio moves until then. Right now we simply don’t know enough.

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