OLD Media Moves

The stock market’s wild ride

October 25, 2012

Posted by Liz Hester

After dropping almost 4 percent in three days, the stock market closed down again Wednesday after showing a few signs of rebounding. Market volatility isn’t anything new for investors, but it does beg the question of what exactly should we believe?

Wednesday’s Wall Street Journal story explains the losses through Tuesday:

With Tuesday’s declines, some $500 billion has been wiped from the value of U.S. stocks in three days, according to the Wilshire 5000 Total Market Index.

The sudden slump marks a shift in sentiment for investors, who just two weeks ago were debating how soon the Dow would hit a record. Now the question is how much farther it could fall.

Stocks had been on a seemingly endless upward march since the beginning of the summer, thanks in large part to renewed stimulus from the Federal Reserve.

As well, there had been signs the U.S. economy had begun to pick up, particularly housing and employment. Consumer confidence hit its highest level since 2007.

Investors’ faith in the ability of the central bank to prop up the economy was so strong they had largely ignored signs that corporate earnings were weakening.

Wednesday’s Morning Money email from Politico’s Ben White contains this excellent nugget of explanation for the different consumer and corporate viewpoints.

MM EXPLAINER – M.M. asked Wharton professor Jeremy Siegel yesterday at the SIFMA panel about the seeming disparity between the corporate and consumer outlook. Siegel explained that the consumer view is largely informed by the bottoming out of house prices. As prices inch back up, people feel more wealthy. But corporate executives see a very different picture: fear of the fiscal cliff and long-term US debt, the continuing European crisis and the dip in Chinese demand. For them the world looks much scarier, leading to lower forecasts and jobs cuts, a negative.

The simplicity of this stuck with me long after I read it over coffee. Interestingly, this consumer and investor confidence assessment follows on the heels of David Leonhardt’s story in the New York Times about the U.S.’s stagnant income levels. That’s right, salaries and other sources of income haven’t really increased in the past decade.

Many of the bedrock assumptions of American culture — about work, progress, fairness and optimism — are being shaken as successive generations worry about the prospect of declining living standards. No question, perhaps, is more central to the country’s global standing than whether the economy will perform better on that score in the future than it has in the recent past.

Here are a few of the causes of income stagnation that Leonhardt discusses:

At the top of the list are the digital revolution, which has allowed machines to replace many forms of human labor, and the modern wave of globalization, which has allowed millions of low-wage workers around the world to begin competing with Americans.

Not much further down the list is education, probably the country’s most diffuse, localized area of government policy. As skill levels have become even more important for prosperity, the United States has lost its once-large global lead in educational attainment.

With the lowered earnings and forecasts from companies like Google, Catepillar and DuPont, it’s hard to bet on the state of American industry. Dow Chemical is planning to cut 5 percent of its workers and close 20 plants.

What this says to me is that average consumers are either ignoring signs that the global economy isn’t what it should be or that they’re taking the ostrich approach – putting their heads in the sand and hoping it will get better on its own.

But there are some signs of hope. September new home sales were the highest in two years, according to a Bloomberg story. And the Federal Reserve signaled that it plans to keep interest rates near zero until mid-2015, saying the U.S. economy is growing “moderately.”

There are a lot of differing opinions about which economic factors are doing well and which ones should be given more weight. No wonder it’s a challenge for investors to decide how the global economy is doing and what to do with their money.

Don’t expect the stock market to even out any time soon, especially as we see more earnings from companies and start to analyze the lagging economic data as it’s released. Add in the looming fiscal cliff, uncertainty about taxes and the outcome of the U.S. presidential election, the only safe bet on stocks is that they’re going to be volatile.





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