Insights & Advice

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Don’t Confuse the Stock Market with the Economy

The daily machinations of the stock markets permeate our lives. Via the radio, the internet, television and print we are bombarded with the market’s daily ups and downs from the opening bell to the close. No matter how hard we try to ignore it, over time it begins to influence how we think about the economy. With markets making new lows, many forecasters are predicting that where the markets go so goes the economy. Don’t fall into that trap.

I remember one of my grad school professors stating that the markets have predicted 11 of the last 6 recessions. That’s a fairly accurate statement. Although a lot of space is devoted to analytics, charts, graphs and investment tombs on economies, sectors and stocks, it is my experience that what drives markets are two very human failings: fear and greed. Right now there is a lot of fear out there. Some warranted, much more imagined.

Years ago before tax-deferred savings accounts, company retirement plans and on-line brokerage accounts, Main Street was fairly insulated from the antics of Wall Street. Not so today. With so many Americans having a stake in the daily fortunes of the stock market, a prolonged correction like this one can have a debilitating effect on our attitudes. Combined with some real economic problems and the decline in the worth of our homes, it is easy to start believing that we are heading for Armageddon.

Granted there are some similarities between our financial crisis today and the onset of the Great Depression of the Thirties. Banks are failing (although no where near the number that failed in 1933). There was no FDIC back then so depositors like you and I were wiped out. Some argue that today the fear factor should be higher still because the credit crisis impacts the largest banks in the world. The evidence to date indicates those fears are unwarranted. In every case of a failed bank worldwide, depositors have received their money bank. At the same time, governments continue to provide a safety net under the largest of world’s financial institutions.

Yet, when you read that Citibank or Bank of America is asking for bail-outs it certainly gives one the willies. The problems in the auto industry, in General Electric and other companies that have long been the back-bone of American manufacturing also shake our confidence. Yet, the government is even now providing further assistance to the nation’s banks and automakers. Remember too that the true powerhouses of the United States today, companies like Microsoft, Google, Pfizer, Wal-Mart and McDonalds are in no danger of failing.

Unemployment also impacts are attitudes. Getting laid off is upfront and personal. As far as you are concerned it is a depression and there are probably few readers who don’t know someone who has been laid off or is in danger of it. As a result, we feel threatened personally. To make matters worse, unemployment is definitely climbing, even our president says so.

Many point out that the unemployment rate today is still far lower than the 25% peak rate of 1933. That is true as far as it goes. Back then we only had one method of measuring unemployment, you had a full time job or you didn’t. Today we have a whole thicket of measures from U-1 to U-6. The government uses U-3, the total unemployed as a percentage of the civilian labor force, if we use the U-6 measurement the number doubles.

U-6 is composed of U-3 plus workers who are currently neither working nor looking for work but indicate that they want to, persons employed part-time but want to work full-time and discouraged workers who have given up looking for work. So at an official U-3 rate of 10% (the forecasted peak rate of unemployment during this recession) U-6 would be 20%, not far from 1933’s 25% unemployment rate. Try to convince that many people that this is “only a recession”.

The point is that this recession is impacting far more Americans in different ways than any recession in our history. In times past, a typical downturn might hit a particular region or group of sectors and not others. Housing had rarely been clobbered as hard (nor reached such unrealistic heights) as it has in the last few years. Combined with our losses in retirement savings, the typical American has taken several body blows at once. Like Rocky, you may feel the ropes at your back and fear to your front. But no matter what the stock market does in the short term it will not be a knock out punch to you or the economy even though it may feel like it so hang in there and like Rocky “just go the distance”.

Posted in A Few Dollars More, Portfolio Advice