Today we returned to the 50-year average (and are still above the average since 1890). So, maybe stocks were overpriced.
I think the BEA's recent GDP revisions really killed us because it told us that we weren't as wealthy as we thought we were, and not growing as fast as we thought either, hence earnings forecasts were probably overvalued and stocks overpriced. Europe's near implosion last week also hurt, where is growth going to come from? S&P downgrades our long-term Treasuries, and the market gobbles them up:
Historically: 6 month, 5 year, 10 year, and 30 year yields:
But the market also gobbled up gold:
That suggests to me that people are worried about "uncertainty" and probably European defaults more than anything.
If the Fed comes out tomorrow with an explicit NGDP level target, price level target, or just says "we'll hold the fed funds at 0.25% until 2014, no matter what," we'll see a strong rally and the economy will get moving again. If they had done that in 2007 we wouldn't be here right now. But, alas.
If Boehner locks the Tea Party in a closet and holds another slurpee summit with POTUS to get a "Grand Bargain" that includes serious tax reform and revenue increases ironed out clearly beyond 2013 we would also see a strong rally and S&P would probably throw itself on its sword. If they had done that a month ago, what a wonderful world it would be. But, alas.
If Europe would just protect Greece's creditors and Europe's banks and let Greece exit the euro, I think we'd also see a strong rally. They should have done that in 2008. But, alas.
Unfortunately, I think all the above scenarios are equally highly unlikely, and everyone above is hosed.