The Last Time The Dow Was Here (Oct. 2007) vs. Today:
- Dow Jones Industrial Average: Then 14164.5; Now 14253
- Regular Gas Price: Then $2.75; Now $3.73
- GDP Growth: Then +2.5%; Now +1.6%
- Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
- Americans On Food Stamps: Then 26.9 million; Now 47.69 million
- US Debt as a Percentage of GDP: Then ~38%; Now 74.2%
- US Deficit (LTM): Then $97 billion; Now $975.6 billion
- Total US Debt Oustanding: Then $9.008 trillion; Now $16.43 trillion
- US Household Debt: Then $13.5 trillion; Now 12.87 trillion
- Labor Force Particpation Rate: Then 65.8%; Now 63.6%
- Consumer Confidence: Then 99.5; Now 69.6
- S&P Rating of the US: Then AAA; Now AA+
- Interest Rate 12-MO. CD Then 4.04%; Now 0.31%
- Total Unemployment rate (U-6) Then 8.4%, Now 14.4%
- S&P 500 P/E Ratio Then 15.7; Now 13.7
- VIX: Then 17.5%; Now 14%
- 10 Year Treasury Yield: Then 4.64%; Now 1.89%
- EURUSD: Then 1.4145; Now 1.3050
- Gold: Then $748; Now $1583
The past 5 1/2 years, we all saw the value of our portfolios drop and recover and home values plummet while many people lost their job and the average family income actually dropped by around $4,000 per family. Many of the figures above illustrate historically poor financial and economic positions for our nation. Despite this, the “Dow” has recovered all of its drop and just made a new high.
How did the stock market manage to recover these past five years?
Corporate America got lean as many companies trimmed every imaginable expense (jobs being one of them) in an effort to be profitable. Many were effective and are growing profits. Some blue-chip firms earn a large percentage of their money overseas and that has buffered what was going on here at home. This should continue and it will be important to watch the impact of the new health care laws and taxes beginning in 2014.
The Federal Reserve, in an effort to combat the Great Recession has bought trillions of dollars of mortgage bonds and U.S. Treasuries to juice the housing market and the economy in general.
On balance these purchases — which go by the non-threatening name of “quantitative easing” — have been warranted, given the deep economic problems caused by the financial crisis. But the time is approaching to scale back the bond-buying spree and get ready to unwind some of the Fed’s massive portfolio, which now tops $3 trillion. The longer the policy lasts, the more likely it will end unhappily.
The Federal Reserve’s purchases have driven interest rates to near zero. This has stimulated the economy but not without cost. Savers, particularly older ones trying to live on income from their investments, are starved for safe options. They’ve been forced into stocks, which is one reason the market has been acting as if it’s on steroids. Further, with borrowing costs low, Congress and the White House have less incentive to rein in the national debt. Rock-bottom interest rates have also distorted markets.
The best indication that the Fed’s bond-buying purchases are pushing stocks up artificially is that investors run for cover whenever there is a hint that the Fed might change course, as happened recently. On Monday, billionaire superinvestor Berkshire Hathaway CEO Warren Buffett told CNBC that markets are on a “hair trigger“ waiting for signs of change from the Fed. The market is “hooked on the drug” of easy money, Dallas Fed President Richard Fisher told Reuters.
What’s ahead for the markets?
While the Fed continues to pour money into the economy the stock market should continue to do well. The Fed has said it will continue to do so until the economy picks up and Unemployment is down to 6.0%. Based on the current economic policy, I think it that could be quite a while until we are near that figure. The economy is in a slow plodding mode with new jobs barely keeping up with the new people who enter the work force. The Fed policy will keep interest rates very low which is good for borrowers, but terrible for those living on fixed income investments.
If corporations are able to keep growing their bottom line, their stock prices should follow. Stocks also look good when compared to bonds as U.S bond prices are at historically high prices and low yield.
There is plenty to be concerned about as our Nation goes deeper in debt and has not had a budget for the past four years. At some point, the world may lose faith in our Dollar and markets and this could lead to another calamity. For now, the U.S. seems to be benefiting from economic conditions being even worse in Europe, making us the least “ugly duckling”.
After a lost decade of U.S. stock market returns, investors need a retirement plan more than ever to guide their return needs and asset allocation. Retirees in need of income should invest for “total return” rather than chase high yield (risky) bonds. Also, protect your IRA and 401k from volatility with prudent diversification.