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Is All Hope Lost?
By Jerry Slusiewicz | June 30, 2008 | 3:53 PM | 3 Comments
The stock market has been down five of the last six weeks. June will turn out to be the worst performance for the Dow Jones Industrial Average, since 1930. It has also given back all of the gains it made since September, 2006. Since last October the Dow is down almost 20%, the very definition of a bear market.
Crude oil was up last week up 4.5% finishing the week at an all time high close of $140.62 as traders shrugged off good news of an increase in inventory levels and word that Saudi Arabia is increasing output in July. GM closed the week out down 16% - to its lowest stock price in 53 years. Jet manufacturer Boeing was down 12% for the week as airlines struggles to stay out of bankruptcy. The only sector up last week was Energy - up 1.4%.
The Dow Jones Averages broke support on Thursday and may decline to next support at 10,680 or 6.5% lower from here. The NASDAQ and the S&P 500 held above support, but weakness in the housing and financial sectors may pull the rest of the economy down into a recession. With food, oil and gas prices at extremely high levels, a repeat of the 1970's style stagflation may become the order of the day.
Is all hope lost? No! First off the market has already gone down 20% - much of the risk has already been taken off the table. Second; at some point the high oil prices change consumer habits. We are already witnessing a drop-off in demand from the US consumer. China recently lifted some 18% off the subsidized price for gas to its population. While speculation is rampant in the commodities market it is driven by speculation, not fundamentals. In the end fundamentals always win out. When and from what price remains to be seen, but at some point we will see commodity prices drop, which will be good for the rest of the market.
The Fed met last week and announced no more rate cuts are in the future, and that they feel the slowing economy will relieve the inflation pressures from food and energy. Many were disappointed that they did not raise rates and view their lack of action as a willingness to let the US dollar decline some more. I feel differently about their decision. The Fed is stuck between a rock and a hard place when it comes to interest rates. Out economy is weak and to raise rates now would really kill off any hope the American consumer and the banking system has to regain their footing.
Housing prices are down in all the major markets on average by over 15%. A home is the largest asset that most Americans own. Obviously retirement accounts' are down almost 20% with the market - the second largest asset most Americans have. This is deflation for the wealth of America. With this drop in wealth going on, the American consumer will be tight in the upcoming future. This will have a ripple effect that will be felt around the globe. Demand from around the world will slow causing commodity prices to fall with it. That will allow for a new footing to take place and start the growth cycle once again.
When will this all happen? That cannot be predicted -but we are probably closer than most people think. Consumer Sentiment is at levels not seen since the early 1980's. It is always darkest before the dawn. The markets will start to recover long before the economy. For now cash is a great place to be as a temporary safe haven. Some exposure to commodities is still warranted until we see the unwinding of that trade.
For more information, or a free portfolio review call my office at (800) 449-9501. Visit my website at http://www.yourmoneytalks.com/ Read my comments or listen to my podcasts here on the Green Faucet.
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Comments (3) | Related Topics » The Market | Economy
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