Nearly 11 Month's Worth of Gains Wiped out In 11 Sessions

The last time the S&P 500 traded this low was on September 16, 2010.The difference between then and now, is that back then the market was in the middle of a sustained rally - now it is in the middle of a sustained selloff. The S&P 500 (SPX) finished Monday's session down 79.92 points (6.66%) to 1,119.46. The Dow Jones Industrial Average ($DJI) closed down 634.76 points (5.5%) to 10,809.85. The NASDAQ (COMP) was the biggest loser of the major indexes, losing 174.72 points (6.9%) to 2.357.69. They say the stock market is a forward looking indicator. Since the lows of 2009, traders and analysts were, in essence, saying to themselves, “it cannot possibly get any worse”, and therefore, started buying everything in sight, pushing up indices to pre-financial meltdown levels in the process. Well, as we have seen in the past eleven sessions, things can get worse. In fact, they can get a lot worse. The rally that has taken place over the past two years has been built on the hopes of a significant reduction in the U.S. Unemployment rate, a rise in home prices (or at least a halt of home price declines), an expansion of GDP and manufacturing growth, and a call to fiscal order in Washington D.C. As it seems, all of that is easier said than done. The fact of the matter is that nothing really has changed since the financial crisis of 2008. The only thing that is somewhat better today is the liquidity in the credit market. That lone “bright spot” hardly matters anyway, given the fact that most U.S. companies are not lending, buying, or hiring – they are simply hoarding cash. Even the most creditworthy consumers still have to jump through hoops to obtain financing for even the smallest of purchases, let alone for big ticket items such as cars or homes – something that has been greatly stifling to economic growth. The Bureau of Labor Statistics pins the unemployment rate at a lofty 9.1%. July's drop from 9.2% to 9.1% was not so much as a result of hiring, as much as it was due to Americans simply leaving the workforce. Even more discouraging is the fact that the real unemployment rate in the United States of America is estimated to be around 16.2%. The large disparity between the two numbers is due to the fact that the real unemployment rate is a combination of the unemployment rate, the number of people working part-time who want to be working full time, and the number of people who have left the workforce but would still like to be employed. Home prices in the United States have not, and probably will not be recovering anytime soon. Low mortgage rates (if you can even qualify) have not offset high unemployment and the fear of another potential downturn. Americans are simply in no position to be making large purchases given such economic uncertainty. As a result, home rental prices have soared in nearly every major U.S. city over the past 24 months. The more home prices decline, the higher the number of underwater owners. That obviously leads to more defaults, which leads to a continuation of the negative housing cycle. What Washington D.C. did not seem to, and still does not understand is that this crisis began in the housing market – and it can end there. A house is the single largest purchase an American will make in their lifetime. If they feel insecure about their home, their overall confidence drops along with their discretionary spending – a death knell to an economy of which 2/3 is derived from consumer purchases. Zillow estimates that 28% of homeowners are currently underwater on their mortgages and expects home prices to decline as much as 9% in 2011. How does anyone expect any sort of recovery with staggering numbers such as these? Manufacturing data is just as bleak. Last week, the Institute for Supply Management announced that its index of national factory activity (ISM manufacturing index) fell to 50.9 in July from 55.3 in June. A number above 50 indicates expansion. Congressional leaders, President Obama, and President Bush have wasted years and hundreds of billions of dollars on failed economic stimulus packages and bailouts - none of which have addressed any of the major problems that plagued, and are currently plaguing our economy. The failed efforts have been nothing more than an illusion, and as we are now seeing, the market is finally starting to recognize it. The scariest part of the market's recent plunge is that back in 2008, the government seemingly had tools to fight an economic collapse and could provide at least some form of a backstop. Now, given all of the fiscal turmoil in Washington D.C., investors have to wonder if the government is willing, or even capable of providing any kind of impactful economic assistance. If the past five years have taught us anything, they cannot. As it stands, the market is panicked and is showing no signs of stopping its freefall. As an investor you should be asking yourself just one thing - “Why should it?”