Wednesday, November 26, 2008

IBD: Era of Fear

The S&P 500 chart for Fall 2008

IBD is running and op-ed piece on: Market Swings Indicate We're In Era Of Fear

Astonishing stats:
In the last few months, we've had 25 days in the stock market where it moved 4% or more. That 25 number equals what had occurred in the previous 25 years. Whoa.
In other words, this is an unprecedented amount of volatility. And fear.

Americans have decreased their savings rate down to zero, and a result of that has been an extra $1 Trillion spent each year. Wow is our economy going to miss that!

Since September 2007, Americans' personal wealth has dropped about $9 trillion, says economist Nigel Gault of IHS Global Insight. A common estimate is that every dollar's change in wealth causes people to change their spending by 5 cents. If so, the hit to consumer spending would be $450 billion ($9 trillion times .05).

But the mechanics of this cycle differ sufficiently from any since World War II as to raise doubts. Americans are less upset by hardships they've experienced than by those they imagine.


The stock market is nothing if not a psychological barometer. The present signal is unmistakable: fear.
It's not just that the market dropped by more than half; that decline parallels some previous post-World War II bear markets (48% in 1973-74 and 49% in 2000-02). More revealing are the day-to-day movements.

From mid-September to Nov. 21, there were 50 trading days; on 25 days, the market moved 4% or more (16 down, nine up). In the previous 25 years, there were just 25 daily moves of 4% or more. We've gone from one a year to one every other day.

The wild stock swings confirm the palpable fear and uncertainty. On average, households expect to spend only $418 on holiday gifts this year, down 11% from last year. Unemployment remains well below the average peak of post-World War II recessions (7.6%). What terrifies Americans is the prospect that the slump will become worse than average — and that government has lost control of events.

or the past quarter-century, higher stock prices and home values propelled the economy forward by inducing Americans to spend more of their incomes and to borrow more. In 1982, the personal saving rate was 11% of disposable income; by 2006, it was almost zero. The lowered saving rate added about $1 trillion annually to consumer spending — more shoes, laptops, books — out of a total of about $10 trillion.

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