Yesterday’s drop of 238.42 points by the Dow Jones Industrial Average was a clear message: The stock market sees trouble ahead for the economy. The Dow is now down almost five percent so far this year and we are only five trading days into the year. As for the NASDAQ, it has been down eight trading days in a row!
In early 2007, I predicted that the U.S. economy would be in a recession by the first quarter of 2008. I still have that view… and I think that’s where we are right now. The massive amounts of liquidity that got the stock market up for most of 2007 are gone. That liquidity, courtesy of the credit crunch, is now dissipating. All of 2007’s stock market gains by the Dow have now been wiped out.
The signals were all out for investors to see in 2006 and 2007 following the burst real estate bubble. Thanks to Alan Greenspan for bringing interest rates to a 46-year low. American consumers spent like there was no tomorrow and now the American economy will pay the price for the good times gone.
Job growth in December was very disappointing. The Institute for Supply Management reports that the U.S. manufacturing sector contracted in December. Housing sales, forget it. According to the Dow Jones U.S. Construction Index, the chart says we are headed back to 2003-2004 house price levels! Car sales in the U.S., despite all the incentives offered by manufacturers, were at their lowest level in 2007 in almost 10 years.
Technically, the government cannot call a recession until we see two consecutive declining quarters of Gross Domestic Product (GDP). But that’s only a statistic that tells you where you are when it is too late. The business climate out there right now, according to my contacts, is very difficult… and I expect it will get worse.
What’s an investor to do? Stay away from stocks that suffer during recessionary times. Stick with stocks that go up when interest rates go down because the Fed will have to decrease interest rates plenty to jump-start this economy.