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Fast, deep, out of control: The confounding market rout

Wall Street pundits predicted 2016 wouldn't be a cheery year for equity investors, but the reality has turned out to be far, far worse.

During the first six trading weeks of the year, the S&P 500 and Dow Jones industrial indexes have both declined more than 10 percent, while the Nasdaq has slipped more than 11 percent. Global equities are approaching a bear market, or a decline of 20 percent.

With wild swings from day to day, Americans are viewing their diminished retirement portfolios and stock accounts with anxiety, while questions mount about what's causing the volatility -- and what should investors do about it.

The stock market is off to its worst-ever sta... 02:45

What's ailing the market, however, isn't entirely clear, at least given the abundance of theories now floating on Wall Street. The sharp decline in publicly traded stocks is prompting fears about a recession, even though the stock market isn't a barometer for the strength of the U.S. economy.

The pessimism from investors could be a self-fulfilling prophecy, in that fears of a global downturn could be prompting shareholders to sell. Still, real issues ranging from China's slowdown to the rapid decline in oil prices are rippling through the world's economies.

The bad news for investors, according to New York University economist Nouriel Roubini, is that the global economy appears to have arrived at a crossroads marked by several problematic trends, creating what he calls "the New Abnormal." Other forecasters are predicting that investors should brace for more of the same.

"Investors may have grown weary of the bleak midwinter volatility, but unfortunately, spring is still a long way off," BlackRock managing director Russ Koesterich wrote in an investment note earlier this week. "The elements are in place for continued volatility."

BlackRock is advising investors to seek out strategies that reduce volatility, such as investing in assets that provide steady income. Last month, Goldman Sachs recommended that investors who are concerned the U.S. will slip into a recession should consider stocks of companies that either have strong balance sheets or rely on the U.S. for most of their revenue.

Still, it's hard to know how to react without understanding what's driving the market, and unfortunately, Wall Street seems about as bewildered as Main Street.

Here are four theories about what's behind the stock market rout.

It's the global economy, stupid. Some fear forces outside the U.S. could spill over into the domestic economy. With the International Monetary Fund cutting its global economic outlook last month, that has added to skittishness. China's economic growth is slowing, cutting demand for commodities, which is roiling economies everywhere.

Blame the Fed. Given that the stock rout occurred right after the Federal Reserve boosted rates for the first time since 2006, some are pointing fingers at the central bank. Economists such as the left-leaning Economic Policy Institute have expressed concern that the hike wasn't justified given the still-recovering U.S. economy. Federal Reserve chair Janet Yellen on Thursday called the December decision "tranquil" and pointed to other issues, including weaker global economic growth.

Sovereign funds and oil prices. The theory here is that rich oil-producing countries poured their money into U.S. stocks back when their liquid gold was selling at all-time highs. But now that oil prices have collapsed -- scraping the $26 per barrel mark on Thursday, the lowest since May 2003 -- they're liquidating their positions, putting more pressure on the U.S. markets.

Higher wages, slower productivity: U.S. stocks, at least, may be feeling the impact of higher wages, according to BlackRock. While earning more money is a positive development for American workers, it comes with a downside for many corporations because it lowers their margins. "If rising wages are not accompanied by faster productivity, profit margins will come under pressure," Koesterich noted.

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