Consumer Spending Goes on Strike

October was the worst month for the stock market in 21 years. The Dow Jones Industrial Average ended the month of October down 14%, while the S&P500 Index was down 17%. Things could have been a lot worse.

 In fact, October was shaping up to be the worst month for stocks since the 1930s. But, at the end of October, the market rallied back from a severely oversold condition. For the week ended October 31, 2008, U.S. stocks had their biggest weekly gain since 1974, with the Dow Jones up 11% last week.

 At this juncture, the amateurs are coming out and calling the market bottom. In my humble experience, bull markets take stock prices considerably higher than people expect. Bear markets take stock prices lower than expected.

 As investors, we need to look at the market and realize that it became oversold very quickly. Hedge funds needed to liquidate as prices moved lower, mutual funds needed to sell as investor redemption slips poured into the mutual fund companies. We must also remember that September and October are generally the worst months of the year for the stock market.

 Moving away from the stock market and looking at the economy, the U.S. economy is close to pathetic. Consumers have gone on a buying strike — they have closed their wallets and are deferring purchases. I have many friends that own their businesses right across North America. From what I can access, consumer discretionary spending is down between 30% and 50%. Consumers are taking a “wait and see” approach to spending.

 Just yesterday, General Motors Corp. announced that its October sales fell 45%, while Ford Motor Co. reported a 30% drop in sales. Sales at Toyota, Chrysler, Honda and Nissan — all down double digits in October. Across the board, sales at the auto makers were down 32% in October, the 12th straight month of declining sales. I read one report from a GM analyst that said, adjusting for population growth, October was the worst sales month for GM since just after World War II.

 In the boom stock market years that ended in 2007, the best day of the month for investors, and many consumers, was the day their retirement or stock account statement arrived in the mail. Today, opening those monthly statements and seeing losses of 30% to 40% has become outright depressing, especially for those individuals getting close to retirement and who were depending on those funds to retire.

 My expectation is that the rally we are experiencing by the Dow Jones Industrial Average (closed yesterday at 9,319) from the Dow’s intra-day October low of 7,773 will continue, simply because the stock market became so severely oversold. However, at some point — and it may be some months off — I do expect the lows to be tested again.