The Dow Jones Industrial Average (DJIA) is off 13% from July 21, 2011, when it was at the 12,724 mark. That’s a 1,754 point drop in just a few weeks!
Well it appears that Wall Street woke up and read the news. Unemployment recently dropped a fraction to 9.1% – and it's been bad for a long time. They still say inflation isn’t a problem, but even so, wages aren’t keeping pace with it – and that’s bad. The bank problem never went away, a not so small 888 banks remain on the FDIC’s trouble list (see WSJ.com: Bank Failures Slow, but ‘Problem’ Backlog Looms, July 8, 2011, Joan E. Solsman.) Add to that anemic economic growth; first quarter GDP growth was revised down to .4% – that's awful! Anything less than 1% growth is a zero growth economic condition. The world currency market is persistently in disarray: with Greece, Spain, Italy, and Portugal, teetering on the brink of bailout and calamity. Everywhere you turn, Market fundamentals are increasingly negative -- and have been for a long time.
Recovered from a drunken debt ceiling debate, Wall Street traders and money managers woke up and sold off "the market."
This is what happens in Markets with conditions like these. As mentioned in the previous blog, inflated markets correct. That’s what just happened. An inflated stock market corrected. Here’s how that looks.
That's the stock market, and investors, struggling to figure out fair valuation of economic potential. It's volatile. Uncertainty causes this. It feeds speculation. All are forever part of stock market investing. Never forget that. Like I said in the book, markets have a human rythym.
Listen to them!
Also note in the above chart that the Dow is now resting below Nominal GDP (its target.) To translate that picture into economic words: Investors are telling us right now that they see GDP shrinking – a.k.a. a recession -- in the future. Remember, the stock market is a leading indicator of the market.
And who could blame them?
The U.S. government cannot keep spending at its current pace. We all know that. Investors know that. And unless bold pro-growth policies are enacted at the same time as dramatic spending cuts, the economy will have no choice but to shrink -- and then the stock market will sell off. That's the way it works. Every time.
PS: Make sure you're comfortable with your asset allocations. That's imperative in times like these.