Market Still Gripped By Fear

15 Jan, 2009

Posted by: earlhines In: Investing| Markets

Earl Hines

Don’t Let It Grip You

The Dow Jones Industrial Average fell 248 points on Wednesday, following the latest round of dark economic news. Retail sales fell 2.7% from a year ago in December, a decline twice as large as economists had expected. Meanwhile, after investors closed the door on a miserable, gut wrenching 2008 - most had hoped the new year would return to a more normal market cycle. Unfortunately, fears about the nation’s banking industry continue, and as the banks go, so go the markets.

After the government airdropped more than $250 billion into the banking system in 2008, investors are increasingly worried that job losses and the slowing economy will soon result in rising defaults on credit cards, auto loans and other consumer debts. Consumers are under pressure, and the banks, already laden with bad mortgages, could suffer greater and greater losses unless we stem the tide of unemployment, now greater than 7% nationally.

Our government is hard at work attempting to plug the holes in our economic dike. President-elect Obama asked Congress to release the remaining $350 billion in stimulus from last year’s “TARP” program, a request lame-duck George Bush echoed as well. President Obama will take the oath of office next week with the prospect of a multi-trillion dollar national deficit looming.

We need to brace ourselves for the fact that the US government is going to run very large deficits for the foreseeable future. No one likes this, but the option of borrowing billions more to inject into our ailing economy is only slightly worse than the option of not doing it. With job losses mounting, and consumers reducing their spending — we are entering what could be a period of deflation where prices drop because too few consumers are chasing too many goods and services. This sounds like a very attractive situation, but on the contrary, rapidly falling prices can become a negative spiral where consumers and business refuse to invest in new projects on the belief that prices will eventually go lower. From there, businesses suffering from lack of demand lay-off more workers, who eventually can’t make their mortgage and credit card payments, coming full circle to put more pressure on our nation’s banking system.

In short - we must stabilize the job market and household income if we are to return to a period of economic growth. This is going to take some time. So, in the interim, try not to overact to the negative news and our current economic woes. Fear cannot drive you a successful long term investment strategy. We expect job losses to continue through 2009, and that unemployment might rise to 8 or even 9% before it begins to improve. Even if President Obama gets everything he wants from Congress (not likely) and invests in major public works projects and the development of alternative energy, it will be 2010 before most of the impact of this spending is felt in the jobs market.

Always keep in mind that day to day market volatility is driven by investor psychology, and currently the mood is pretty dour. But keep your fear in check. Put 2008 in the history books, expect 2009 to be tough sledding, but stick to your long term investment plan. Any review of history shows that we have had many more good days in the stock market than bad, an in the fullness of time, markets have always trended up. At the end of the day, you have to choose to be optimistic about the future. If you do. at least history (if not the popular media) is on your side.

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Tags: Investing, Markets

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Market Still Gripped By Fear

Don’t Let It Grip You

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