Those most enthusiastic about the economic recovery are highlighting the fact that nominal (not adjusted for inflation) consumer spending has recently risen above its 2008 prior peak. If the present trend continues, real (after inflation) consumer spending should very shortly exceed its prior peak as well.
Consider the reality. The government has handed us an unprecedented amount of money over the past year and a half. That money did not exist in this country before its distribution. It has been borrowed or printed, with the liability passed on to future generations. We spent the money. Therein lies the economic recovery.
Forget the morality question of bailing ourselves out with our grandchildren’s money. Is the plan even likely to succeed? While we have bought ourselves time, there is still no assurance that we won’t experience the systemic collapse that the bailout was designed to remedy. Many banks and some countries are essentially bankrupt. Recent reaction to the attempted rescue from a similar potential economic catastrophe in Southern Europe is far from encouraging. Succeed or not, we are passing along a massive economic dead weight that will drag on the economy for future generations. What a legacy we are leaving!
End Of A Weak Month
This week provided stock market investors with quite a ride. The Dow Jones Industrial Average closed last week just below 10,200. In this week’s five days the average traversed from several peaks to troughs and back by a total of about 1565 Dow points – down 420 points, up 400, down 275, up 310, down 160, then some smaller bounces to end down 56 points.
This month was the worst May since 1962. The Dow declined by almost 8%, the S&P 500 by just over 9% and the Nasdaq Composite by a bit over 8%. The S&P 500, which most investment managers use as a benchmark, is down for the year as a whole by about 1.5%, back to the levels of last October as well as the levels of 1998.
In last week’s post I mentioned fear has reemerged. A few severe plunges have called into question the almost unanimous opinion of investment professionals that this is merely a correction in an ongoing bull market.
The plunge to the week’s lows on Tuesday morning left the markets severely oversold and more than overdue for a meaningful rally. As mentioned earlier, markets did bounce aggressively, but traders could not string strong days back to back. Markets retreated again early today and tried to rally into the close, but selling came in the last half hour to leave the Dow off 122 points at the close.
As the indexes remain severely oversold, the probabilities favor a rally soon. On the other hand, it is always worrisome when oversold markets don’t rally when they should. Some of the market’s biggest declines have occurred with conditions already oversold.
With the world financial system in a precarious condition, there is legitimate danger that a major mis-step somewhere in the world could unleash a cascade of stock market selling.
Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.
