Horizon Still Looks Ominous

“The Financial World According to Inya” Column,
by Inya Ivkovic, MA
After a great summer and an acceptable September, there came October’s darkening clouds. The fourth quarter commenced with stocks diving to their lowest levels for the past three months. All it took were dismal manufacturing and employment numbers or, shall I say, lack thereof, to remind people they are actually pessimistic about the economy.

 

As if right on the proverbial historic schedule, most major indices lost somewhere between two and three percent of their market cap, while investors rushed into bonds looking for safe havens. For the last six out of seven trading sessions, stocks have tumbled. Has the seven-month rally in the stock market ended? Is the history really repeating itself? Are we seeing the repeat of a rally after the crash in 1929 that was followed by a recessionary decade? Gosh, I hope not, but fear seems like a very natural emotion right now, because I cannot be the only one worrying about a repeat of last September through March. It is clear that the economy is still very vulnerable when a couple of bad reports can shift investor sentiment so much in the wrong direction.

So, what soured the mood so much? It started with the Labor Department confirming that jobless claims rose 551,000 last week, while everyone expected the figure to remain flat at 535,000. But what really scared investors was the unemployment rate for the full month of September, which currently stands at a 26-year high at 9.7%, while most analysts expect it will hit 10% by the end of the year or early into the next. Wall Street grew even more pessimistic when the Institute for Supply Management released numbers on September manufacturing activity that dropped more than sector analysts had predicted. Obviously, this will be a difficult recovery and not the kind that involves enjoying a steady, uninterrupted line. We all just got reminded of that, that’s all.

In other economic news last week, the Commerce Department confirmed that August consumer spending recovered the most in almost eight years, even as personal income growth remained stifled. However, what keeps consumer spending rocking at the moment may not be sustainable for much longer. Apparently, the government’s “Cash for Clunkers” program has had a lot to do with this and, once it runs its course, consumer spending is more than likely to return to its old anemic self.

And, while the National Association of Realtors said that August home sales rose 6.4%, it is not as if everyone is jumping in like in the old days. In fact, investors are still cool towards this market, so another real estate bubble is not likely to form anytime soon.

All in all, as long as investors and consumers worry about the timing and pace of the recovery, stock markets are going to be volatile and betting on trends should not be done. The world of soaring stock prices and unjustifiably high valuations is gone and it seems both the Street and investors have forgotten all about it. Back in the fourth quarter of last year, it seemed that the market was disintegrating before our very eyes. Today, having the S&P 500 Index holding up just over 1,000 points sure looks much better than zero, for sure. But let’s just not forget that things can still go terribly wrong.