Dow Falls Below 12000 (11893.69) - Loses 3% For the Week
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It was hard to find any ray of sunshine in the market this week. Virtually all of the economic news was negative and the market reacted as you would expect - losing 372.7 points or 3% on the week to close at 11893.69. There were signs that the credit crunch that started with defaults on subprime loans has spread to the point where it is effecting main street, i.e. the pocket books of us all.
The workings of the economy is so darned complicated with so many parts intertwined, that it is hard to put the blame on any particular part or group of people. You could say the Federal Reserve acted too little or too late, or that it is the deficit spending on the war, or that it is due to free-trade agreements, or whatever. However, in the end it usually comes down to an excess in some part of the economy and the system has to reset and re-balance that excess so that it may move on.
The excess this time could be found in the irresponsible lending and borrowing practices used in buying homes. How could it make sense that property values kept increasing by 10 - 20 - or even 30 per cent per year? How can you lend 110% of a property's value with no down payment? How can you keep borrowing the equity in your home and think you will never have to pay it back? The average home equity in the United States is now under 50% as compared to 80% in the late 40's. As we have seen, in some cases what is owed on some homes is more than they are worth.
So now you will read much about the big R word, otherwise known as recession. Many believe that after the poor jobs data reported on Friday, that we are already in a recession. Employers shed 63,000 jobs in February - the most in five years - after trimming 22,000 jobs in January. Such back-to-back monthly employment declines have usually occurred around recessions. Before the employment report, many economists had said the labor market, while weakening, wasn't signaling that the economy was in a recession. Many changed their thinking on Friday.
The most accepted definition of a recession is a decline in a country's gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year. We have not experienced this in the U.S. since 2001 when a recession lasted 8 months. The exact dating of a recession comes from a business-cycle dating committee of the National Bureau of Economic Research. This committee probably wouldn't declare a recession, if one occurs, before summer. They would wait until they could definitively mark the starting point..This committee announced the beginning of the last recession in March of 2001, eight months after the fact, and by which point it determined later, the recession was already over.
This would suggest, as many believe, that we are already in a recession. If that is true, the only good part about it is we may be out of it before it is declared official. To what extent the economic stimulus package congress has passed coupled with interest rate reductions implemented by the Federal Reserve will forestall or cushion a recession, nobody knows. The Fed is expected to cut interest rates again when it meets March 18. The futures markets is betting it will cut the federal-funds rate, charged on overnight loans between banks, by 0.75 percentage point from its current 3%.
Some have said that recessions are anticipated by stock market declines. If you think about it, that will always be true because we have stock market declines every year. In the last ten stock market declines of greater than 10% in the Dow Jones Industrial Average, none were followed by a recession. At this point however, the DJIA is down 16% from it's high last October of 14164.53, but still does not qualify as a bear market (down 20% from it's recent high).
The real pessimists may not only see a recession but also a full blown depression. This is a severe or long recession and is a devastating breakdown of an economy. This is very unlikely to occur under present global economy conditions. However, everything is relative and I like what newspaper columnist Sidney J. Harris said : "a recession is when your neighbor loses his job; a depression is when you lose your job." Meanwhile, remember to keep your risk within your tolerance and keep ahead of inflation.
I invite your questions.
Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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