Markets find hope in spite of gloomy forecasts
After strong earnings reports by Goldman Sachs and Intel this week, major market indices posted impressive one-day gains Wednesday with the Dow and S&P up about 2% and the Nasdaq up more than 2.5%. While it is nice to see some positive numbers, these gains emerged amid of plethora of reports showing continued economic weakness.
The past couple of weeks bad unemployment numbers have been a drag on the markets. Tuesday there was an op-ed piece in the Wall Street Journal explaining that the real jobless numbers are worse than government reports indicate. Written by U.S. News & World Report Editor-In-Chief Mortimer Zuckerman, the article was titled: “The Economy is Even Worse than You Think.”
He cited the fact that instead of laying off employees, many companies are asking workers to take unpaid leave or to work fewer hours. The average work week in the private sector is now just 33 hours–the lowest level since the government began recording such data 45 years ago. The average length of official unemployment stretched to 24.5 weeks–also the worst since tracking began.
Instead of the 9.5% rate reported by the Bureau of Labor Statistics, Zuckerman wrote that when those who have taken part-time jobs are added in, the total jobless rate is at least 16.5%.
This week the Federal Reserve released a forecast that predicted the jobless rate could rise to as high as 10.1 percent in 2009, compared with the previous forecast of 9.6 percent. The report indicated that most Fed policymakers said it could take five or six years for the economy and the labor market to regain long-term stability. In the meantime, officials reported “the economy as still quite weak and vulnerable to further adverse shocks.”
In spite of the Obama administration’s efforts, the housing market also remains weak. According to a report released Thursday by foreclosure listing service RealtyTrac Inc., the realty crisis meant more than 1.5 million homes faced foreclosure in the first six months of the year. That is a 15% increase over the prior six-month period. The report said foreclosure filings rose more than 33 percent in June compared with the same month last year and were up nearly 5 percent from May. Foreclosures are not expected to peak until the middle of 2010.
Thursday the U.S. Treasury Department announced that in May, foreigners actually sold $19.8 billion more long-term U.S. securities than they purchased. That compared with net purchases of $11.5 billion in April. That is significant because one of the major means the U.S. has to try to buy its way out of this economic crisis is by selling bonds. The last time foreigners sold more long-term U.S. securities than they purchased was in January. That month sales exceeded purchases by $36.8 billion.
The reason I am bringing all this negative economic news to the forefront is simply to point out that the risk of another significant market downturn remains very high. Some analysts predict that the economy and the markets will not bottom until 2010. We have no way to know exactly when the economy will turn around. But right now there is a distinct possibility that stocks could decline an additional 20%, 30%, or even more.
Big one-day up moves in the markets like we saw this week are tempting, because investors want to avoid being left behind when the next bull market begins. But enthusiasm for potential profits needs to be curbed until there are definite signs that the economy has the strength to sustain long-term market momentum. So far that does not seem to be the case.
F.S.