The swings in the Dow Jones industrial average are dramatic, so I’ll use that index for my example. Since July 25 we’ve had 15 trading days; 10 of these days involved swings one way of 1 percent or more, eight of those days experienced swings of 3 percent of more and a whopping six of those days saw swings of 5 percent or more.

When the market behaves in this manner it is indicative of investors attempting to price in events for which there is insufficient information or very little historical context. Here’s what I think is on the table.

Over the past four months the U.S. economy has clearly slowed. The question has become, are we in a recession, heading for a recession or simply taking a breather?

Much of the weaker data illustrating the slowdown can be logically linked to supply disruptions coming from Japan, but not all of it. Job growth, while occurring, is not sufficient to sustain our economic recovery and data on consumption and consumer and business confidence is erratic. The typical recession leads to a 30 percent decline in stocks. As of Friday the Dow is 11 percent off its recent high.

Secondly, the European credit market situation is escalating. The greatest fear has always been that problems in the Greek and Portuguese bond markets would spread to the large economies of Spain and Italy. Over the past few weeks this has started to occur. While we now appear to be pulling back from the brink, investors remain nervous about rising borrowing costs in the Italian and Spanish bond markets and policymakers in Europe are impressing no one with their response to the issues. Serious problems of this nature would be catastrophic for global credit markets.

And third there was the inevitable downgrade of the U.S. government’s credit rating that came a week ago Friday night. Whether or not you agree with S&P is irrelevant; this action creates considerable uncertainty and could have far-reaching implications. Read More