The Trouble With Markets

Stock markets around the world are way down this week. You know this.

The next line in the story is supposed to be why the markets are down.

But this week — as is often the case with market gyrations — the why doesn't seem particularly clear. Of course, there's plenty to worry about in the global economy, and plenty of possible explanations for why markets may be falling.

This morning's WSJ, citing the big falloff in U.S. stock prices, points out that "there was no one particular piece of news that drove Thursday's market swoon."

Instead, investors said it was an accumulation of worrisome developments, primarily out of Europe, where officials are struggling to convince the market they have the Greece crisis under control. Worries mounted that the troubles may spread beyond Europe to stymie growth elsewhere.

Well, sure. But those are the same worries everybody's been talking about for weeks now. So why the falloff this week?

Maybe Germany's unexpected ban on shorting certain securities drove the market down. But Reuters blogger Felix Salmon points out that, back in 2008, a ban on certain shorts was said to drive markets up.

If you want to look closer to home, you could cite this week's higher-than-expected numbers for unemployment claims, or the slight decline in the index of leading economic indicators. Maybe mention the Senate finance bill. And wave your hands around about that weird May 6 "flash crash" making people nervous, and the SEC announcing its response this week.

But keep your explanation short. If you run on for too long, you'll find the market turning up again, and you'll have to come up with a new explanation.

"U.S. stocks rose for the first time in four days as investors speculated equities may have fallen too much this week on concern about Europe's debt crisis," Bloomberg News said in a story this morning.

All this talk of investor psychology omits the basic idea (in theory, at least) behind buying a stock: investing in a share of a company's future profits. One common measure based on this idea is the ratio of the stock price to the company's profits. This is known as the price-earnings ratio, or P/E for short.

Bloomberg News notes today that the P/E for the stocks in the S&P 500 index is 15.5. This spreadsheet from S&P shows that average the P/E for the index between 1936 and 2008 was a bit less than 16 — pretty close to where the market's trading right now.

But that's just one more explanation.

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