Stocks just ended their worst quarter since the financial crisis. The Nasdaq and S&P 500 each lost more than 12%.
Of course, we know the recipe for what's weighing on the stock market: the continued Euro-debt saga, with a pinch of slowing China thrown in.
China has been one of the few engines of growth for the global economy, even as Chinese officials work to slow inflation. You can see the result in copper prices, which have been devastated over the last two months.
Since August, gold and copper mining giant Freeport-McMoran (NYSE:FCX) has been very nearly cut in half, and copper prices are off 25%.
Similar action from Caterpillar (NYSE:CAT), down 33% in 2 months, tells the same story -- slowing Chinese growth is a big worry right now. It buys around 40% of the worlds' copper.
Inflation has been running above 6% in China for a few months now. The assumption is that China will continue to slow its economy, thereby lessening its demand for copper, coal and other commodities.
But it's worse than that because we really don't know how much we can trust data from the Chinese government. And it could take some sort of economic collapse in China for us to get the real picture. While this may be a low-probability scenario, it's why fears of a Chinese slowdown can look exaggerated. And for some investors, simply going to cash is the best defense.
Oil, a reliable measure of investor growth expectations, was crushed Friday and closed below $80 a barrel.
The stock market is pricing in much slower growth -- and perhaps global recession. Investors are moving to cash as a reaction to the uncertainty. That's the only way to interpret the recent action.
Now it's not like growth expectations are outlandish. Economists are calling for just 2.2% growth next year, after 1.6% growth this year. I'm not sure how comforting that is considering that these same estimates have been consistently lowered.
Bloomberg offers some interesting statistics on earnings in recessions:
S&P 500 profits fell an average of 12 percent on a yearly basis in the nine recessions since the 1950s, according to data compiled by Bloomberg. Should earnings drop by the same amount from the estimated $99.17 a share this year, profits will total $87.59 in 2012. Based on the S&P 500's Sept. 30 close of 1,131.42, that would imply a multiple of 12.9.
So even if earnings contracts 12% next year, it's still hard to call stocks expensive right now.
It's often tough to point one single event as a turning point for an economy. But I think we can point to the moment when Congress played chicken with default as a moment when confidence in the U.S. economy took a sharp nosedive.
Not that confidence was soaring before that defining moment, but it's been in the tank since we realized our country was virtually rudderless with ineffective political leadership.
And after all, an economy is about confidence more than anything else.
Now, I'm willing to hold out that the end of a quarter is never a bullish event. And that the S&P 500 has been finding support in the 1,120-1,130 range. I'll even point out that we haven't seen any significant earnings warnings as we approach 3Q earnings season (even though analysts have hacked bank estimates).
And we are getting close to the point where a decision on Greece -- and Europe as a whole -- will have some finality. Just this morning, Greece is admitting that it can't meet the austerity requirements of the bailout program from the EU and IMF.
Greece remains the most important near-term catalyst for the stock market. And today's admission should push a final outcome to the forefront. Let's hope, because investor confidence is eroding every day.