Why the stock market took a dive Wednesday

The Dow fell 185 points as the autumn swoon continues. Partly, the slide was due to worries that President Obama and Congress can't cut a deal to fix the fiscal cliff. But other factors were at play.

By Charley Blaine Nov 14, 2012 6:09PM
Why, you ask, is the stock market slumping?

Good question on a day when the Dow Jones industrials ($INDU) suffered its third loss of more than 100 points in the last six sessions, and the Nasdaq Composite Index ($COMPX) has fallen more than 10% since mid-September, the popular definition of a correction.

The answer is more complicated than simply the fiscal cliff or Barack Obama's reelection, although the former was clearly at play today. President Obama insisted at a news conference he would not agree to extend Bush-era tax rates on the wealthy. Republicans says they won't agree to boosting top tax rates, and the question is which side will blink first.
The result today was that the Dow fell 185 points to 12,571. The Standard & Poor's 500 Index ($INX) dropped 19 points to 1,355, and the Nasdaq was down 37 points to 2,847.

The Dow and S&P 500 have fallen 7.5% since their 2012 peaks on Sept. 20 and Sept. 14, respectively. The Nasdaq is down 10.6% from its Sept. 14 peak. The Nasdaq-100 Index ($NDX), down 30 points to 2,532 today, has fallen 11.6% since peaking on Sept. 19. Yes, that means the Nasdaq-100 is in correction, too.

Here are five more reasons that fill out the picture.

Apple's fall from grace is affecting everything. Apple (AAPL) is down 23% from its closing high on Sept. 23. It represents 4.2% of the S&P 500 and 17% of the Nasdaq-100. If it sneezes, a lot of others get hit. Cirrus Logic (CRUS), an important Apple supplier, is down nearly 32% since peaking in September. Nvidia (NVDA), whose chips help power in the iPad and Macintosh computers as well, is off 16%. Broadcom (BRCM) is down nearly 17%. Image: Arrow Down © Kyu Oh/Photodisc/Getty Images

In fairness to Apple, the stock was grossly overbought in September and more than ready for a sell-off. So were Amazon.com (AMZN) and Google (GOOG) for the matter. In fact, Amazon is down 14.7% since Sept. 14; Google is off 8%.

Hurricane Sandy is upsetting expectations. Retail sales fell 0.3% in October, the Commerce Department said today. Analysts believe that Sandy looks to be a big reason for the decline, if only because around 20% of all U.S. retail sales are generated in the middle-Atlantic states. Revisions may change the estimate, but the decline was a decline, and investors were dismayed. One other factor in retail sales: Gasoline prices fell 7% during the month. Investors may be cheered by November sales, which will reflect some of the spending required to repair everything Sandy damaged.

Geopolitical concerns erupted again. Israeli forces launched aerial assaults on Gaza today. Some 20 targets were hit, and the top military commander of Hamas was killed. Israel insisted the strikes were in response to recent rocket attacks. The strikes drew condemnation from Egypt and escalated the risks of a new war in the Middle East. Crude oil (-CL) in New York jumped to as high as $86.65 before falling back to $86.32. Brent crude hit $109.30 a barrel but pulled back below $108.65, a gain of $1.31. Gold (-GC) was up $5.30 to $1,730.10 an ounce.

Europe is a mess. We know the wrangling over how to straighten out the euro debt crisis is far from over. And investor frustration looks to be building. Germany's benchmark Xetra Dax Index ($DE:DAX) is down 2.2% this month and 4.2% since mid-September. France's CAC-40 Index ($FR:PX1) is off more than 5% since mid-September. We don't know if Greece's government will run out of cash at the end of the month. It's a possibility.

European worries have pushed the dollar higher against the euro. A rising dollar makes U.S. exports more expensive to non-U.S. customers. The U.S. Dollar Index is up 1.3% this quarter and 0.7% this year. The index measures the greenback against a basket of currencies, with the euro the biggest factor. The index was flat today, but nearly half of the Dow's loss today came from five stocks: IBM (IBM), Caterpillar (CAT), Boeing (BA), Chevron (CVX) and Home Depot (HD). The first four have huge businesses outside the United States.

How will this downturn end?

Let us assume -- as most people do -- that no one wants the country to go over the fiscal cliff -- the imposition of federal spending cuts and increases in income tax rates. So, a rally should erupt when it appears a deal is at hand. The market overall is primed for a rally. The major averages and the Nasdaq-100 are all oversold by many measures.

More from Top Stocks

Nov 14, 2012 9:58PM
You have to admit that without a Congress that is prepared to do the business of the country and get the needed legislation passed, including the budget and cutting spending, as well as eliminating a Bush Tax cut that favored no one except the Republican elite, and sent bags of money out of the economy and into Cayman and other bank, the impasse will continue, the deficit will continue and the debt will continue. But that's all she wrote. Until these things change the future will be already spent, undoing what the 8 years of the Bush administration created. ( and people bought houses they couldn't afford, and the money got hidden.
Nov 14, 2012 9:53PM
Like it or not we will throw more money at the problem and be derated again. The Stock market hasn't produced a trustworthy product for many reasons. I get tired of hearing it is because of Europe because they buy the most of our goods. Here's a trick why don't we stop buying China's. Spread it around a little bit. I don't really need that much, especially from a communist country.
Nov 14, 2012 9:41PM

I think that the sooner the Republicans give the President "everything" he wants/demands, the better.  "you want this?"  "you got it"......"you want that?"   "you got it".....


Then all of us should take a good look in the mirror and hopefully, a lot of us own property in another country.

Nov 14, 2012 7:08PM
Stocks slide on Fiscal cliff and Apple's fall from grace ! "BULL" "S"  !  Stocks fell because the stock market is rigged against the small investor ! Stocks fell because the American consumer has no faith in its politicians, Banks and government ! Get ready for the worst Holiday season since the GREAT DEPRESSION !  AMERICANS ARE TIRED OF BEING SCREWED !
Nov 14, 2012 6:26PM
I don't think the administration nor congress are concerned to the point of action.  President Obama has never exhibited a sense of urgency or outright concern regarding the economy.  It appears his primary driving force is to cement a win against his rival republicans without regarding the fallout.  The democrats are erroneously assuming they have a public mandate.  Let me make it simple!  THERE ARE NO MANDATES!  WE, THE AMERICAN PUBLIC WANT YOU TO GET OFF  YOUR RESPECTIVE REARS AND FOR ONCE DO YOUR DAMN JOBS!
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