What's Really Causing the Stock Market to Crash?

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Referenced Stocks:CVX;GE;GOOG;IBM;JNJ;JPM;KO;PG;T;WMT

(List compiled by Alexander Crawford. Data sourced from Finviz.)

Last week we saw the first-ever credit downgrade of US Treasuries – but bonds (ironically) rallied after the news. The debt crisis in Europe has been mounting amid violent rioting – but that’s been happening for over a year.

So why did we experience recession-like plunges in the stock market this past week?

One possibility is the growing fear of weaker economic growth in the U.S., which might make the global financial system more susceptible to problems in Europe. 

In an interview with National Public Radio, Nigel Gault, the chief U.S. economist for IHS Global Insight, said, “Simply put, the evidence that's been coming in over the last few weeks doesn't point to any pickup in U.S. growth…I think that the slowdown in growth puts us at a point where we are extremely vulnerable to shocks which potentially could push our economy over the edge into recession."

In the same tone of disappointment, minutes from the Federal Open Market Committee released this week cited that “economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.”

Most notably, the minutes cited the need for “exceptionally low levels for the federal funds rate at least through mid-2013.”

Indeed, analysts from all corners are lowering their economic growth forecasts for the U.S. The U.S. Commerce Department released a disappointing advance estimate of Q2 2011 GDP growth at 1.3% (when surveys indicated that 1.8% was expected), while also revising Q1 GDP growth from 1.9% down to a meager 0.4% growth rate.

However, even 1.3% GDP growth for Q2 may now be optimistic. U.S. trade deficit data for June just arrived, showing a $4.1 billion decrease in the value of our exports, leading some analysts to lower their Q2 GDP growth estimates to 0.8%.

This data may sound disheartening, but don’t discount America’s ability to pick itself up from the ground. Betting against America has always been a losing bet.

To get an idea of where the market is headed, it is often best to look at the market leaders: the largest companies with high exposure to the business cycle. These companies can be great predictors for where our economy (and the world’s) is headed.

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Here we list the 10 largest companies in the S&P 500 index by market cap:

1. International Business Machines Corp. (IBM): Diversified Computer Systems Industry. Market cap of $199.12B. The stock has gained 32.21% over the last year.

2. Chevron Corp. (CVX): Major Integrated Oil & Gas Industry. Market cap of $188.42B. Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 3.32%, current ratio at 1.53, and quick ratio at 1.33. The stock has performed poorly over the last month, losing 10.49%.

3. Google Inc. (GOOG): Internet Information Providers Industry. Market cap of $181.51B. The stock has gained 14.25% over the last year.

4. Johnson & Johnson (JNJ): Drug Manufacturers Industry. Market cap of $173.90B. The stock has gained 12.34% over the last year.

5. Wal-Mart Stores Inc. (WMT): Discount, Variety Stores Industry. Market cap of $172.69B. The stock has gained 1.24% over the last year.

6. Procter & Gamble Co. (PG): Personal Products Industry. Market cap of $168.73B. The stock has gained 3.99% over the last year.

7. AT&T, Inc. (T): Telecom Services Industry. Market cap of $168.42B. The stock has gained 12.9% over the last year.

8. General Electric Co. (GE): Diversified Machinery Industry. Market cap of $166.21B. Might be undervalued at current levels, with a PEG ratio at 0.88, and P/FCF ratio at 10.55. The stock is currently stuck in a downtrend, trading 9.41% below its SMA20, 12.35% below its SMA50, and 14.46% below its SMA200. The stock has performed poorly over the last month, losing 15.29%.

9. The Coca-Cola Company (KO): Beverages Industry. Market cap of $152.62B. The stock has gained 22.84% over the last year.

10. JPMorgan Chase & Co. (JPM): Money Center Banks Industry. Market cap of $145.79B. The stock is currently stuck in a downtrend, trading 8.57% below its SMA20, 10.01% below its SMA50, and 14.85% below its SMA200. The stock has lost 1.61% over the last year.