Last Week In The Financial Markets

We’ve had a chance to reflect on the stunning events that have taken place in the financial markets last week. Gale force economic winds, treacherous credit currents and a downpour of negative sentiment, all conspired to brew up a perfect storm over the past fortnight, and led inexorably to the whirlwind of the last 8 days.

It has been just a week since the harrowing drop in stock prices on Thursday August 4th. After a slight recovery Friday, the market went on to lose 634 points on Monday, regained 429 points on Tuesday, fell 519 points on Wednesday and gained 423 points on Thursday. Today, the Dow is up 110 points on moderate volume as we move somewhat calmly into the final hours of trading.

The economy got some good news on Thursday as applications for unemployment fell by 7,000. However, consumer confidence numbers released today fell to the lowest index level since 1980, led by a plunge in confidence in our governmental sector (no surprise there.) On the other hand, retail sales for July, also announced Friday, posted their biggest gains in three months. Emotionalism and fear mongering have run rampant. Still, real and serious concerns have driven the markets lower.

The unexpected downward revision of 1st half US GDP growth. The market’s assumption of 3.2% GDP expansion was entirely mistaken, and ratcheting this number down to less than 1% was unexpected and severe. This alone would have triggered a market correction.

Wrangling over the debt limit. Lack of more specific economic reforms by Congress. Last minute fixes. Loss of confidence and perception of a dysfunctional government.

European credit problems have festered for the last 12 months, and efforts at repair have suffered from a delicate political/economic balance. We believe the EU will do what is required to stabilize markets, and probably just in the nick of time, The ultimate solution is likely to have profound effects on the balance of power between the EU and each country’s sovereign economic policy. It has already happened in Italy.

The objective reality is very challenging. On one hand, corporations are hoarding loads of cash that they have been unwilling to put to productive use, yet insider buying at companies in the S&P 500 is higher than at any time since March 2009. Averages and historical statistics have their limits, and can be misleading. However…

  • There have been 37 market declines of 10% or greater since 1950. On average, one every twenty months. These corrections drove stock prices down an average of 19.7% from their peak.
  • In 34 of the 37 corrections, the market was up 12 months later by an average of 26.8%.
  • Market corrections signaled 37 of the last 10 recessions! In 27 of the 37 corrections, no recession followed, despite the most dire predictions.
  • Over 40% of these market corrections lasted less than 3 months.            

What will it take to turn things around? Maybe reflection on some of those qualities which enabled Americans to overcome far more serious issues than we face today. The apocalyptic vocabulary of our political arena has permeated our thinking. Every challenge, every difficulty, whether unsustainable debt levels, tax reform, or unemployment, has become a portent of impending doom and national decline, rather than a problem to be solved, or a challenge to be met. Many people have just given up. They seem to feel that rebuilding our global economic leadership, restarting our domestic economy, increasing capital investment and productivity and employment aren’t attainable goals but pipedreams. That’s simply not true and our history bears this out over and over again... We just can’t let our politicians lull us into despondency. It’s their vision, not ours.



Steven Weber

The Bedminster Group

August 12, 2011

TAGGED: Investments
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