(MoneyWatch) Investor fears have turned into reality: The current earnings season is on track to be the first since the post-financial crisis recovery began that corporate earnings are falling.
Now that a number of companies have reported their financial results, the mood appears to have shifted from "earnings could be bad, but who wants to be short when the Fed is buying bonds?" to "Wow, earnings are really bad -- who cares if the Fed is buying bonds?"
That sentiment pushed major indexes to their lowest level since early September. The Dow Jones industrial average fell 243 points, or 1.8 percent, to close at 13,103. The Standard & Poor's 500 lost 21 points, or 1.4 percent, to 1,413. The Nasdaq composite was off 26 points at 2,990, down 0.9 percent.
The decline was among the worst of the year on Wall Street, with the Dow's steepest drop coming on June 1 when the index fell 274 points.
Today's earnings misses included Dow components DuPont (DD) and 3M (MMM), both of which not only missed estimates, but also warned about the future amid a slowing global economy. The warnings are weighing on investors, who fear that corporate America is hitting a massive speed bump and will be hard-pressed to deliver earnings growth that justifies current prices.
And what would a sell-off be without the ever-present specter of the European debt crisis? Spain, the eurozone's fourth-largest economy,, matching the second quarter's results. The report coincided with a warning that Spain's tax revenue might not be enough to meet its budget targets for the year. At some point, Spain will need a bailout, but evidently, not yet.
In addition to earnings, slow growth and eurozone worries, there's also another powerful incentive that has soured investors on stocks: The old risk vs. reward calculation. As one hedge fund manager said to me this morning: "Consider these facts: coming into today's session, the S&P 500 was up about 14 percent this year; capital gains rates are at 15 percent right now, but will likely go up in the future. With the outcome of the election unclear and the 'Fiscal Cliff' looming, I don't see how owning stocks makes a lot of sense right now."
When this guy says right "now," he means right now, as in today or this week. For the long-term investor, that kind of short-term-it is could be deadly. As a gentle reminder, most of us should be sticking to our game plans and not be unnerved by a day or two of stock market drops. In fact, its days like today when investors are their own worst enemies, when they sell out of fear, only to later allow greed to creep in and encourage them to jump back into the market after it has gone back up.
To help you break your fear-greed cycle, follow these 3 steps:
1. Don't make any rash decisions amid a big downturn
2. Maintain diversified balanced portfolio
3. Stick to your game plan!