It is a sign of the times that market participants were relieved that the Dow wound up falling only 100 points, or 0.9% yesterday. That is because it looked far worse earlier in the day, when the Dow was down at one point by over 300 points. The market was reacting at the open to the sharp declines in European markets on Labor Day, when the U.S. markets were closed. The Stoxx Europe 600 Index had fallen 4.1% on Monday on renewed worries about the European debt crisis. The U.S. stock market reversed course on Tuesday following a better-than-expected ISM Non-Manufacturing Report, suggesting that concerns about another recession in the United States might be exaggerated. Nonetheless, the VIX index of future market volatility implied by options prices closed at 34 – a level well above its historical average of around 20 and high enough to signal substantial investor apprehension about the course of future stock market movements.

At this point, investors are understandably wondering when the seemingly relentless selling of stocks and flight into Treasuries, gold, and other perceived safe havens will come to an end. The question to ask is when — or at least how — the issues that have driven the recent market volatility are likely to be resolved.

It is not hard to identify the sources of the selling and flight to quality in recent weeks. On July 22 the Dow Jones Industrial Average had risen to 12,724, near its peak for the year. Within weeks, however, the markets had to contend with wrangling over the extension of the U.S. debt ceiling, a downgrade of the U.S. debt rating by S&P, a spate of weaker-than-expected economic numbers, doubts about the commitment of Greece and Italy to fiscal reform, and the unwillingness of some members of the European Union to go along with bailout packages. More recently, the focus in the markets seems to have shifted to jobs, and whether the fiscal tightening scheduled to occur in the United States and Europe will tip those economies into recession.

Identifying the sources of the market turmoil does not help in indicating when the issues will be resolved, if only because problems a long time in the making — as they were on both sides of the Atlantic — usually take a long time to solve. But it does help in pointing to signs that a turnaround is coming. These would include:

1. Agreement from the Deficit Reduction Committee by its November 23 deadline on a debt reduction package large enough to stabilize the federal debt in the medium term, but one that would not require near-term fiscal tightening sufficiently severe to derail the current economic recovery.
2. Parliamentary approvals of the measures needed to put the European Financial Stability Facility (EFSF) on a sound footing.  The EFSF is a special purpose vehicle for providing assistance to financially distressed Eurozone member states.
3. Initiatives to solve the European debt crisis that would involve private sector participation in a debt exchange. (July’s Greek bailout package, not yet completed, envisaged private sector participation.)
4. Continued supportive monetary policy in the United States, and some easing by the ECB.

Market participants no doubt differ in their judgments about how these issues will be resolved. But at least decisions to be made are there for all to see.