“Home foreclosures hit record high,” “Homeowner Equity Lowest on record,” “Employers slash jobs most in 5 years,” need I say more concerning this weeks’ headlines? On the back of an ever-increasing torrent of bad news, the global stock markets faltered, stumbled and then fell this week. Now we teeter on the edge. The re-test of the bottom I have been predicting since January has arrived. The question is will the markets hold?
Although the Federal Reserve and other Central Banks around the world have repeatedly injected large sums of money into the credit markets it isn’t reviving the short-term lending markets. Banks, like kids terrified of jumping off a diving board, are refusing to lend, worried that they will lose the remaining capital they hold and drown in a pool of bad debt. The litany of foreclosures and bankruptcies hitting the wires every day simply justifies that stance. This is causing a domino affect in lending across the spectrum.
Remember, this is a nation of debtors and cutting off the loan spigot is like denying an addict his drugs. We can’t survive long without our fix and the stock markets know it.
As consumer confidence this week plunged to its lowest level since 2002, the dollar plummeted and Americans for the first time witnessed a drop in the amount of equity in their homes to less than 50%. Meanwhile, stock investors fled to hard commodities like oil which topped $105/barrel, a record high. All week the market averages marched downward toward the lows of last month.
Friday the battle continued. Investors struggled all day to keep the averages above the critical support level of 1290 on the S&P 500 and 2202 on the NASDAQ. They succeeded but just barely. The bulls’ victory, in my opinion, was inconclusive and will pick up with vigor on Monday. As I’ve said before, it is anyone’s guess if this level will hold but if it doesn’t, I expect we will see 100 points downside on the S&P or another 8%. That would put the index about even with the average correction the S&P 500 has historically suffered during a recession.
Of course, as a born optimist, I am hoping that we will successfully test this low rather than break through it. The coming week should be very interesting. If the market does hold, I would become much more positive and if it doesn’t well…