Stock traders are worried that what happens in Europe won't stay in Europe.
Countries including Greece and Spain are being forced to make budget cuts because of soaring debts. Investors are concerned that this new frugality could slow not just the European economic recovery, but the global rebound as well. So they're shrugging off signs of a sustained U.S. turnaround and are instead taking cues from developments abroad.
Investors are focusing some of their concern on the euro, the currency shared by 16 European countries. Sagging confidence in Europe's ability to solve its economic problems has sent the euro plunging against the dollar. Investors believe that the dollar's strength combined with weaker growth in Europe will reduce demand for U.S. exports and hurt the recovery that U.S. companies, particularly manufacturers, have been enjoying.
"Manufacturing has been doing very well. Exports have been doing very well. And if there is any fear that the global engine is going to slow, even at the margins, it creates uncertainty," said Quincy Krosby, chief market strategist at Prudential Financial.
It's clear that traders have lost some of their swagger. The Dow Jones industrial average posted a 14-month gain of 71.2 percent from March 2009. It's down 5.2 percent since late April. The Dow tumbled 163 points Friday after the euro fell to a 19-month low against the dollar. The market still closed higher for the week after falling in the two previous weeks, but there was no sense of relief on Wall Street.
As they sold Friday, traders looked past upbeat reports on retail sales and industrial production. The reason: They make their moves based on what they expect the economy and corporate profits will be six to nine months in the future. Investors are now factoring slower growth in Europe, and perhaps a recession, into stock prices. Good news from the U.S. economy last month is now almost immaterial in traders' eyes.
And, if there are any signs of weakness in U.S. economic reports, that will likely be seen as an bad omen and set off more selling.
Investors also are concerned about the stock market itself, especially the return of the kind of volatility seen during the financial crisis. The Dow has posted swings of more than 100 points in 11 of the past 14 days. Analysts say the bumps will continue until it becomes clearer how Europe will manage its debt problems. Early enthusiasm over last week's nearly $1 trillion rescue plan for Greece and other countries has faded.
Many traders are predicting that the ride will continue to be rough. The Chicago Board Options Exchange's Volatility Index — called the market's fear gauge — is up 79 percent since April 26, when the Dow closed at its 2010 high of 11,205. The rise in the volatility index means investors are forecasting more drops in the market.
"At the end of the day it's always about confidence," Krosby said. "We tend to look at our markets as the barometer of that confidence."
The stock market's swings started just as individual investors were returning to the market after fleeing in 2008 during the financial crisis.
"This is only lending to the skepticism that individual investors have," said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
But John Silvia, chief economist at Wells Fargo, said the market's ups and downs aren't a big worry just yet. He said investors are simply struggling to determine how problems in Europe might slow a rebound.
"The market is trying to figure out what is the pace of that recovery," he said. That makes for messy trading. "It's like the great wild car ride."