by Bob O'Brien
I really wish I could agree with those that have said that this economy will not be that bad, and I actually sympathize with leadership in striking a balance between not “talking down” the economy and yet preparing people for the economic reality. When Captain Sully Sullivan landed that Airbus plane on the Hudson River a month ago, he said “Brace Yourself for Impact”.
There will be no “V”
In case you are not familiar, this is shape of some recoveries in markets. They hit a bottom and then they bounce back up and the market looks like a “V”.
This was the case with stocks in the 2000-02 market when the market hit a bottom and then bounced back up. Unfortunately this will not be the case this time with the market. We have probably not found the bottom yet and when we do, we will probably just bounce along on that bottom for a while.
S&P 500 Double Tops, then Crashes!
Many people fail to realize that the 1929 crash was not the final blow that lead to the depression. In fact, the market rallied in the early 30’s, but then sunk to even greater lows. It was only after this in which there was a prolonged bear market. You can see there was a half of “V”, before the real major losses (click on chart to enlarge).
Here are the reasons why there will be no “V”... No earnings…
In order to have a robust stock market you need strong earnings, and there will only be a fraction of the companies that are profitable like (WMT) Wal- mart, (MCD) McDonalds and other consumer staples. Just a few companies like these cannot carry the entire market.
It is important for the 401k and broad based market investor to understand that you are not just investing in the stock market, but you are investing in the earnings of all these companies that make up the market!
Another wave of bad mortgages… Alt A loans will be the new sub-prime for 2009. Check out this article in regards to the alt-a loans. This is going to beat up the banks even further, and may bring down some big insurance companies like The Hartford (HIG), Principal (PFG) and Lincoln (LNC).
Continued drops in Real Estate… Even if the residential real estate market does stabilize, the commercial real estate market is looking worse and worse. Many of the real bubble areas have come down significantly like California and South Florida. But there is still a lot of room for decreases in the Northeast and other parts of the country that did not get so out of control.
There will be no “V” for the real estate market either.
We are all getting too accustomed to bad news… The fact that the Commerce dept. revised its #’s and that the economy actually shrunk 6.2% in the 4th quarter as opposed 3.8% should be major news. It was not because people are tired of hearing all the negative news. The market has also been down over 20% year to date and most people don’t seem to have a clue.
Consumers will continue to cut back… This is really a positive for the long run, but for the short run this is a negative. This is the first consumer-based economy, and will probably be the last! The American consumer wants to be prosperous and is realizing fast that you cannot borrow and spend your way to prosperity.
The Lack of margined/leveraged investors/credit… This is the type of investing that usually pumps up the market, and all these types of investors have been burned real bad and couldn’t get credit to buy stock even if they wanted to.
The good news is that we will survive this horrible economy, and no one will go without the basic necessities.
It has often been said that it is times like these in which there is room for great leaps in growth! There’s nothing like a crisis to make people get on their toes!
