The Real Reason Behind Recent Soft Stock Prices

By now, you’ve likely heard or read about how Federal Reserve Chairman Bernanke “sent” stock down earlier this week when he said recent figures showing inflation is rising is an “unwelcome” development. The popular media reported Bernanke’s comments pushed stocks lower because his concerns about inflation could mean interest rates will continue to rise.

Don’t let the news fool you!

Personally, I feel Bernanke’s comments have little to do with the stocks market’s decline. His statements are a way for Wall Street and Bay Street to again appease investors… “Bernanke’s comments sent the market down, that’s why your stocks are down!” The Street’s never ending story of blaming someone for investors’ losses.

The truth, my dear reader, is that stocks have been falling aggressively since May 10 of this year, long before Bernanke’s comment on inflation. Over the past month, the Dow Jones Industrial Average is down 6%–a big loss for investors. Other popular stock indices are down about the same.

What gives? Why is the stock market tanking?

As I have been writing for months, the change in U.S. interest rate policies that started in the summer of 2004 are simply having a much bigger impact on consumers and the economy than analysts understood. All those mortgage brokers who told their clients: “Don’t worry, interest rates are still historically low” had no idea what they were talking about. Yes, rates are low if you just look at the 30-year fixed mortgage rate. But rates are historically high if you look at interest rates correlated with consumer debt levels and consumer savings rates.

Higher interest rates are choking the construction industry in the U.S. which in turn is hurting the economy. The story is clearly told in the Dow Jones Home Construction Index–which is down 21% in the past month alone! This index is now down about 43% from April of 2005! While untrained and inexperienced reports can blame it on Bernanke:

Consumer real estate and construction stocks are crashing and that’s the real reason the general stock market has been so weak.