In last Friday’s, Market Condition Summary report, I posted comments regarding whether this was a bull or bear market and the disturbing nature of a lagging economic indicator, i.e. Employment Situation report. I promised to post additional thoughts on this and after turning it over and poring over research databases and commentaries to glean additional insight, I have decided to keep it simple.
I do not dispute that the stock market is a leading indicator and that employment is a lagging one. However, some distinction should be made between the monthly employment report vs. initial jobless claims and average weekly hours. The latter two are both leading indicators and give visibility on the lagging monthly employment situation report indicator. As long as the graph for the initial claims continues to resemble a “J-curve” like trajectory and leads its four week moving average and average hours worked remains in a trough, then “the beatings shall continue until morale improves.” A nation whose economic growth is 70% dependent upon consumer spending will find it hard to improve its morale when jobs are scarce. But don’t take my word for it, simply refer to your daily Gallup polls for consumer mood and consumer spending (see current tables below) and ask the man on the street.
So what do consumers do when their morale is low? They save and for most self-reliant Americans, this is the first logical step toward redeeming one’s financial stability and serenity. But, these things take time. There’s no such thing as leverage in personal savings. This is bootstrap stuff and I have been tracking this data point through the St. Louis Fed’s GDP components category for savings and investments. To save myself the trouble of creating my own graphs, I share the results of a short essay on Housing Retrenchment from the St. Louis Fed’s database. It is from Messrs. Riccardo DiCecio (Economist) and Charles S. Gascon (Senior Research Associate). In their essay, they observe that household borrowing reached a peak in 2Q 2006 @ $1.4trn and then proceeded to fall off a cliff to @ -$279bn in 3Q 2008 to confirm the deleveraging (by default or pay downs) from debt. Even more noteworthy is the 5% savings rate of personal income by Americans as of January 2009 (see chart below).
Providers of consumer goods and services and retailers are definitely feeling the pinch. For anyone who doesn’t think it could get worse (in terms of increased personal savings), think again. The personal savings chart (see below) shows that high single digit or low double digit savings rates have occurred in the annals of our economic history and we could indeed see them again.
In the long-run this is healthy, but we’re not talking about the long-run and neither is CNBC. For investors willing to look beyond the nose on their faces, a 12 to 18 month time horizon is about as far as most can extrapolate in our society and culture of immediate gratification. So if we acknowledge that the primary investment savings and wealth creating vehicle for most Americans is their home and consider that the National Association of Realtors (NAR) estimates that from the peak of 2007 thru January 2009 the median home price has declined @ -25% and that other investment savings vehicle, aka the stock market, shows the S&P 500 still down @ -45% since the October 2007 peak-to-date, then a lot of people have some serious bootstrap catching up to do. Anyone who has experienced any of this wealth destruction is more inclined to rebuilding their nest egg instead of spending hard earned cash like a drunken sailor. For those who refuse to modify spending and saving habits and use of credit, they will find themselves entitled to a free vacation at Camp Horse’s Ass.
Yes, new bull markets (which I do not believe we are witnessing) do climb walls of worry, but it is premature to assume we have permanently slayed the Hydra in this global financial crisis and recession. Enjoy the bear market rally and others that will follow. One should not discriminate against making money in a bear or bull market. Profits are profits. However, the manner in which one manages risks and protects profits in a bear market vs. a bull market should be much more judicious.