Investors are back from the beach—and they're not in the mood to buy stocks.
Despite Friday's rebound, the market is down sharply for the month so far and well over 20% from its October highs. In other words, bear-market territory.
There are any number of reasons why the market is still in sell-off mode—fears over employment, housing and inflation high among them. But the true motivator may be much simpler: Investors don't know what else to do.
Uncertainty is always the market's biggest enemy. And with a close presidential election and an economy that may be sliding back towards recession, many investors just don't see much reason to own stocks.
"Nobody knows why on one day investors bail out, or by the same token investors come into the market. It's one of the mysteries of the market," says Quincy Krosby, chief investment strategist at The Hartford. "There are many veterans in this market who look at this selloff and realize what it's doing. It's bringing valuations closer and closer to very attractive levels."
Though the Dow plunged 345 points on Thursday after a jump in jobless claims, venture capitalist Peter Cohan observed that the jobs numbers alone couldn't be responsible for the huge selloff.
"The only people who know why they sold stocks today are the biggest investors in the world who traded. And they are not talking about why they made their move," Cohan said in a statement. "Thankfully, today nobody has offered an explanation for the 345-point decline. And until the SEC requires such investors to report on their reasons for trading--we are really in the dark about what moves stock prices each day."
But there have been several notable trends in the market in recent days, each of which plays its own role in shaping the market mindset.
Job reports are more than just a gauge of what's happening in the workplace, they also represent how consumers on Main Street can do their part to support the economy.
And with the holiday shopping season around the corner and Friday's numbers showing unemployment at a five-year high, the outlook for spending--and its impact on retail profits--doesn't look good. Nor is the news good for banks who are holding consumer debt.
"If I'm losing my job I'm not going to be paying that auto loan, I'm not going to be paying that student loan. What you're seeing is kind of the Rorschach effect. The dots are being connected," Krosby says. "Even though the employment news is a lagging indicator, the trend is there. With a global downturn you can say that the consumer is vulnerable."
That trend was confirmed earlier this week.
Stock picks for all seasons. See video at left.
Even though the retail sales numbers at discount giant Wal-Martwere better than expected, many other outlets, particularly high-end stores, suffered badly.
There was also more bad housing news Friday as the Mortgage Bankers Association reported that foreclosure rates continued to soar. This, too, adds uncertainty to the market.
The housing downturn provides a particularly vexing problem because many homeowners have been using the equity in their homes as a way to finance their lifestyles.
But as property values plunge, that equity is drying up and forcing people to come to terms with the notion that they can't just keep taking out loans on their homes--essentially borrowing from Peter to repay Paul.
"What will take us out of the sideways pattern is clearing up the debt problems we have in the United States," says Peter Miralles, president of Atlanta Wealth Consultants. "The US consumer is tapped out. The consumer has got to quit using his house as a piggy bank."
And speaking of banks, the state of financial firms, which have been pummeled by mortgage defaults, also has investors bothered. Bond magnate Bill Gross of Pimco told CNBC on Thursday that he and other major investors are refusing to buy bank debt until the Treasury Department offers to backstop the debt of those institutions.
"It's one thing after another. That statement from Bill Gross hurt," Krosby says. "It was like the market was being punched."
Turning Good News Into Bad News
The Grumpy Investor
With all the uncertainty floating through the market, there has been little else for investors coming back to the market after summer vacation to do but sell.
Even seemingly good news, like the report Thursday that productivity rose more than expected, brought a black cloud to Wall Street.
"That was a positive read on productivity. It tells you that workers are working efficiently," Krosby says. "Yet when you're in a bad mood, when you're in a negative mood, it also means that companies don't have to hire people."
Forget that the economy is producing more efficiently, the Wall Street translation is more reason for the employment picture not to get better.
"In a market that wants to do down, it's going to take any good news and turn it into bad news," Krosby adds. "This was a market poised to go down. It's still a bear market, and this was a reminder that you're in a bear market."
So Now What Happens?
For many investors it's merely a waiting game until valuations hit the point where the buyers kick out the sellers and the market turns around.
How much time? More uncertainty.
"We will go lower until we find that valuation point where you have value investors come in and start picking through the pieces," Miralles says. "There is some good news, and the good news is that in this decade corporate earnings are up strong, dividends are up strong, and in spite of everything else these are market positives and the market will eventually find a bottom."
Miralles is among those who remain optimistic as they remind themselves that the long-term prognosis is positive. In the nearer term, he points out that September is historically the market's worst month and October is likely to get better.
He particularly likes small-cap stocks, which can recover more quickly than market bellwethers because of their size, and thinks domestic companies will fare better than multinationals.
Others in the same mindset see the sinking stocks as an opportunity.
"Adjusted for inflation this is the worst market in 110 years," Jim O'Shaughnessy, of O'Shaughnessy Asset Management, said on CNBC. "So things can only get better from our perspective because the world is not going to end tomorrow."
Fritz Meyer, of Invesco, also said on CNBC that he likes consumer discretionary stocks, explaining the current strategy as "investing in stocks when the news flow is the worst."
O'Shaughnessy and Meyer discuss their buying-the- bear strategy in the accompanying video.
For Miralles, the current state of the market is like a forest fire clearing the land for development ahead.
"There's probably some really great opportunities over the next three to five years," he says. "Five years down the road I think we'll be looking at this as a clearing out phase."