Much has been written in the last couple of days about the stock market and the 1000 point intranet day break on the DJIA. The reasons attributed to the break are all reasonable, but they lose sight of the events. The stock market is a market of stocks. Bull markets and bear markets mean that most stocks and indexes are running one way. But, first and foremost the market reflects the economic view of it’s participants.
If most investors believe the economy is growing, then stocks should do well because the companies are doing well. If most participants feel the economy is doing poorly, their positions will reflect that view. through it all there will be stocks that run against the main market trend based on their own fundamentals.
The great bull market of 1982 – 2007 ended with the banking crisis of 2008. We are now in a cyclical bear market. One that will take years to unfold and is not measured in one day breaks like yesterday or 1987. From the March 2008 low of 6500 on the DJIA to the rally peak of 11000 the market retraced about 75% of the break. Right on the Fibonacci retracement numbers.
However the rally masked a weak underlying economy Wall Street pundits withstanding. Unemployment is horrible and not getting much better. Housing prices which backstop American’s consumer spending rare week with minimal regional improvement driven by tax subsidies and easy money. Companies have been showing better earnings by bottom line cost cutting rather than top line growth.
The debt situation, both government and consumer is horrible with no signs of improvement. Americans are borrowed out, as are state and local governments. Greece, Spain, Italy, Portugal, and others are borrowed out. Our federal government is spending money, in deference to drunken sailors, like there is no tomorrow. Markets see all of this. They build fundamentals into price.
Prices are in the process of adjusting to the new fundamentals. The market is looking through managed news and looking at reality. The reality is not pretty and the adjustment is not over.
Bear moves can happen with great speed as we saw in 2008 and again yesterday. Stocks are pricing the
fundamentals. This is what free markets do. More regulation will not solve the problem of volatility which will be
with us. As long as there are markets.
Absent major philosophical changes in government both elected and administrative branches of government the future is at best a question mark.
There is a solution. This is the American Solution. Let the people go. Let business do business. Cut taxes, cut regulation, cut spending. Like the flu, things get worse before they get better. When we go back to basic American economics the market will turn overnight. Absent that, it will be a long year.
