This market has nothing to do with the financial outlook for this country's economy (or the global economy). It has nothing to do with the profitability or valuation of companies. It has nothing to do with the price of oil. It has nothingn to do with the pace of manufacturing in China.
This market has EVERYTHING to do with the unintended consequences of Index-Related investment products (Index Mutual Funds and ETF's).
The proliferation of these products, and the proliferation of rationales for advice to investors to use these products has made Financial Services companies who create the indexes, package the products, and sell the advice to investors VERY RICH.
Modern Portfolio Theory? It is an elaborate concept used to sell investors on the idea of the need to diversify broadly among sectors and non-correlated investments in order to hedge against risk, and increase returns. And, since it is so costly and such a hassle to diversify retail clients among individual companies and securities in all these sectors; creating indexes to represent each sector was supposed to simplify it (and make it cheaper) for dummies.
So the Financial Companies make the products, and then their expert analysis tells clients when to rebalance among these products.
Each instruction to rebalance triggers transactions... which profit the Financial Services companies who run the products. It doesn't make any difference to them what the value of the product is... they make money when people buy the product and when they sell the product.
The unintended consequence is this:
Each index product is backed by shares of the companies which comprise the index.
When the signal goes "change the weighting" of the various indexes... some indexes get sold, and others get bought. Regardless of the profitability or value of the underlying companies, they ALL take a hit when the index to which they belong is sold, because some Financial analyst says it is time to underweight (name index here). Of 500 companies in the S&P; it is ridiculous to think that they ALL suck and need to be sold, just because Goldman Sachs analysts think it is time to underweight US Equity.
The consequences hit on the upside, as well. Companies that actually DO suck within an index have become OVER-valued as a result of advice to add weight to a particular index. When the genius analysts reading their MPT tea leaves say it's time to load up on US Equity; all of the stocks in the S&P rise from purchases of ETF's and Index Funds that track that index. Even if some of those companies should be bankrupt.
Furthermore, it makes the reliability of Capital from the Capital Markets too unreliable.
Companies who need investors to buy their stock, so that they can expand their businesses according to rational economic and financial practices, can no longer rely on the good name and good management of thier company to get this money. They end up awash in money when they don't need it... and suddenly starved of cash when they need it the most. So they turn to irrational behaviors (like hoarding cash, borrowing money when they don't need it just because rates are low, buying back stock, limiting dividend increases, etc.).
Too much money is being speculatively applied to these indexes by big trading firms and Hedge Funds.
These people are not INVESTING. They are speculating on the intra-day movement of the indexes... and trading billions of dollars multiple times per day trying to capitalize on inefficiencies in the execution of the trades of small retail investors. They can front-run the action, with computers able to see what trades are coming in; and quickly execute profitable trades ahead of those with less clout.
But even with all this advantage; these geniuses still screw up.
Hedgies have bet billions of dollars on Oil futures... seeing the price headed down six months ago; they bought options to capitalize on the inevitable rebound in price. Alas, the Saudi's confounded everyone by raising production even more, and extending the rout in oil prices indefinitely.
With the need to close out these positions; the Hedgies had to turn to their hedge investments and sell them for liquidity... even though the underlying fundamentals of these investments are strong. The selling pressure is an outgoing tide which is putting ALL boats on the bottom.
Furthermore, the same Hedge geniuses offered their clients access to the hot exotic Chinese market that they couldn't get from their retail brokers.
And as the Hedge clients see their Chinese investments get clobbered in the Chinese Government Manipulated Markets; they started clamoring for redemptions.
In order to meet redemptions; the Managers had to sell what was most liquid: US Equities in the form of these Index investments.
So, now, Pa Kettle who retired with his money in his 401k or IRA is seeing his balance come unglued. And his advisors are no-doubt telling him to re-balance (which will entail sellling some indexes low, and buying other indexes high... not exactly the formula for success).
It is well-past time for regulation of the industry.
Capital markets need to be a place where investors get value from providing capital to well managed companies that make money... and where they run the risk of losing money by investing in companies that aren't well run.
Speculators... people who want to gamble on the daily spread, or make a fast buck by jumping in and out of the markets... they deserve a place to engage in this activity. We already HAVE Las Vegas.
It should be illegal to engage in short-term speculation in the Capital Markets.
It should be illegal for Financial Services companies to profit from investing in same products (but on the opposite side) as their investors.
It should be illegal for Banks to use their reserves as collateral for speculative investing. In fact, It should be illegal for retail banks to engage in Investment Banking, period.