The Dow has now gone up for four consecutive weeks, ending back over 8000. Did we hit bottom and is it now on the way up, or is this just a temporary upward swing?
Looking at the weakness in the economy with businesses continuing to go under, my fear is that the market will start dropping again. I am hoping that the market has already taken anticipated bad news, which could include G.M. declaring bankruptcy, into its current prices. On the other hand, any unanticipated bad news might also start the market tumbling again.
I am assuming the market is naturally correcting itself after the crash just as the crash was a response to the housing bubble, but that there will be further panics and upward corrections over time. Whether the market will get ‘worse’ than it got before this round of recovery is an open question, it may and it may not. We certainly haven’t seen the last of the panics, but I think the upward corrections will occur more rapidly after them as time goes on.
Not having much of a portfolio, I am far less interested in the market than I am in the health and growth of the labor and production markets and whether or not the stimulus truly supplies enough infrastructure investment and business investment to help those areas. That’s what really matters. If people are working and doing business, the market will rebound. As long as people are losing their jobs and businesses are folding, things will continue to be unstable on Wall Street.
“If people are working and doing business, the market will rebound. As long as people are losing their jobs and businesses are folding, things will continue to be unstable on Wall Street.”
Exactly right.
The market is trying to account for the future, as best at can, as best we can as individuals in our everyday lives. The only “rational” position to take in the stock market is the long term position, i.e., 10+ years at least.
From this perspective, government monetary and fiscal policy becomes highly relevant because the effects are on the same time scale.
This is one reason why experts across the board are almost obsessed with Japan’s economy since 1990: it’s really the only working, real-world template economist and policy makers have for how well various types of massive government intervention work. The answer so far is — not great. See:
The Age of Balance Sheet Recessions: What Post-2008 U.S., Europe and China Can Learn from Japan 1990-2005
Be sure to take note of Exhibit 12. Yikes!!! 🙁
Oh, here’s something fun. I got my degree from the University of Illinois in the 90’s, and at about the same time, a small but revolutionary company began in town called Wolfram Research (http://www.wolfram.com/). For computational math gear heads, you can’t live without Wolfram’s tools.
Anyway, there’s been a lot of debate over who’s been better for the stock market, the one party or that other party. Most of the debates have relied on over-simplified arguments.
However, you can now play with a small “what-if” ‘stock market as function of who’s in charge’ model — this Wolfram Mathematica demo allows you to control, for variables like inflation, policy lag, etc:
http://demonstrations.wolfram.com/StockMarketReturnsByParty/
In this Demonstration, you can compare what would happen if you left an investment in the stock market (represented by the Dow Jones Industrial Average), but only during those times when either a Democratic or Republican president was in office. Since economic policies can take awhile to take effect, you can choose to shift the time ranges allotted to Democrats vs. Republicans by a fixed amount from the date of the inauguration.
You can also choose whether to include the effects of inflation or dividend reinvestment.
A couple of warnings if anyone wants to really take the results of this tool seriously:
1. Since all spending legislation originates in the House, and since the Congress is responsible for all tax laws, etc., it seems like a more useful tool would allow you to see stock market returns based on the majority party in Congress, with about a one-year lag to account for new laws having effects on the economy.
2. Being that the stock market is a forward discounting mechanism, one cannot compare stock market performance looking only at presidential terms.
But, all that aside, this tool shows that modeling can be fun! and it also shows that one real value modeling is too start you down the road of real thinking.
The stock market is irrelevant, the real issue is much older.
The financial markets have become the tail that wags the dog.
This is the reason that the New Deal focused on infrastructure and abandoned Hoover’s bank bailout plan for a much cheaper temporary nationalization… setting things back in order and then releasing control again, rather than throwing massive amounts of good money after bad. Japan approached its financial crisis in the way Hoover approached the Depression.
This administration appears to be attempting to combine the Hoover financial strategy with New Deal style infrastructure spending. This costs much more than a New Deal style stimulus or a Hoover-style bailout would by themselves. The thinking seems to be that nationalization is ‘bad’, or at least politically unacceptable.
My objection to that thinking (without entirely dismissing the chance that a bailout/stimulus combination will work) is that the defenders of the corporate cartel system we mistakenly call the ‘free market’ under the current FAR from capitalist economic structure are screaming about socialization and nationalization even when they don’t exist. If the political hit is being taken either way, and temporary emergency nationalization is cheaper in the long run, why avoid the reality if one can’t shake the political perception?
The stock market is hardly irrelevant to those of us whose retirement accounts are tied up in it!
Of course not, in that sense, Ron. However, the stock market will go up again when the economy is set on the right footing. The economy will not be repaired by getting the market up. And any attempts to drive the market back up that do not address the weaknesses in economic infrastructure will simply be a new bubble to be followed by a new crash.
I’m not trying to be dismissive of people’s retirement accounts, and I certainly want to see them saved. I am simply noting that supply-side thinking, fixated on the financial markets themselves, will not save them.
I’d be very VERY careful about putting $$ into the stock market in the hopes of catching a spring rally:
There’s this post (“The Fake Recovery”) from Edward Harrison of the site Credit Writedowns:
http://www.nakedcapitalism.com/2009/04/guest-post-fake-recovery.html
The real situation
In truth, the U.S. banking system as a whole is probably insolvent. By that I mean the likely future losses of loans and assets already on balance sheets at U.S. financial institutions, if incurred today, would reveal the system as a whole to lack the necessary regulatory capital to continue functioning under current guidelines. In fact, some prognosticators believe these losses far exceed the entire capital of the U.S. financial system. Witness a recent post by Nouriel Roubini:
Gulp!
It’s time to start investing in those things money can’t buy, like this “75-year-old porn star aims to inspire elderly:”
http://www.msnbc.msn.com/id/30194921/
Now this guy has a stimulus plan that might actually be worth pursuing! 🙂
For those keeping score (and don’t mind tossing and turning all night), here’s how things are stacking up — er, falling down, as of today:
Fortune 500 Annual List is out for 2008. It is FUGLY:
– 2008 was the worst year in the history of the Fortune 500 for America’s largest companies;
– Profits fell from $645 billion in profits in 2007, to just $98.9 billion – an 84.7% decline;
– Eleven of the top 25 largest corporate losses in list history took place last year;
– Insurance giant AIG posted a $99.3 billion loss — the biggest corporate loss of all time;
– Thirty-eight companies disappeared from the list altogether;
And here is half a century of Housing Starts, both Seasonally adjusted and NSA. (lower chart is the annual rate of change)
Note that we are now in uncharted territory — new home starts have never fallen to these levels for as long as the Commerce Department has been tracking this data (since 1959).
Note also the magnitude of the drop — it is unprecedented, having easily surpassed the 1982 collapse, the present circumstances have now become slightly worse than the 1973-75 fall.
Just how much worse is this going to get . . . ?