Volatile stock markets

American and global stock markets fell again yesterday. The US indexes declined by about 5 percent, which is pretty steep for one day. There were hopes that last week's turmoil was an aberration, but yesterday's falls showed that was not the case. It's not 2008, but it's not good either.

Here are some immediate observations:

• The trend is not just downwards; just as striking is the volatility, with a big movement downwards followed by a big movement upwards. This manic behavior indicates that investors are really uncertain about the true direction of the economy. They over-react to the smallest bit of news.
• The volatility also is a reminder that without such a large amount of excessive, speculative money, there wouldn't be such volatility. Investment is not for the long term. Instead, money is in shares one day, and out the next. The money sloshing around markets is the result of shunning investment in productive industries, which lies at the root of today's stagnant economies.  
• The mood has been described as "fear". There is some truth in that. But there are some objective factors that indicate that a negative response is rational.  US and world economic growth does appear to be slowing. Public finances in many countries are stretched, thus risking a fiscal crisis and limiting the potential for rescue measures in the case that conditions do deteriorate. And while many banks' balance sheets have improved, they have not really been tested, as they were in 2008.
• The crisis is as much a political crisis as it is an economic one. The political leaders of the major economies do not inspire confidence in their ability to deal with problems. Investors keep waiting for action, and then they hear an Obama or Merkel-Sarkozy press conference and come away unimpressed. 
• From all indications, the markets are aware that the major economies have been dependent on government spending to prop up recoveries. They therefore respond to the prospect of cuts in spending negatively, as they see the prop being withdrawn without underlying strength. Many investors are actively calling for another round of stimulus spending; indeed it seems to be the consensus. This shows that they are not the free-market buccaneers they are sometimes claimed to be.
• There was a big deal made about S&P's downgrade of US debt from AAA to AA+. But in itself this was not significant. In fact, investors moved into US Treasuries in response, as a flight to safety. US bonds may not be as safe as they once were, but in an uncertain economy, they seem to be relatively safer. This move into US Treasuries continued yesterday, with the yield on a 10-year US bond dropping to a low of 1.97 percent, the lowest since 1962. I'm not saying the downgrade doesn't matter - it does. But its significance is more symbolic about the US economy declining, and, as S&P highlighted, it speaks to the inability of the political class to do the basic job of running government. 
• The market turmoil is truly a globally interconnected phenomenon. US markets are affected by events in Europe, and European markets are impacted by events in the US. And, as we saw yesterday, the market falls began in Asia and Europe. The US woke up to learn of this, and followed suit. On another day, it could work the other way around. Just one market going down can set the others off, that's how unstable things are today.