Stock Market Mania: A Retrospective Analysis

Reflecting on what we thought in the past and seeing how it plays out in the future is always a good test of our “Lasting Logic.” This is an article I posted on March 17, 2013. It’s all here; what I got right, what I got wrong, and hindsight is always 20/20. I had to pause on the “inflation” comment in the third paragraph. Hope you enjoy the throwback read.

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Ronald K
March 17, 2013

Greed, Fear, and Fact

While the stock market is seeing historic levels and record-breaking runs in the Dow Jones Industrial Average, reflecting on the correlation between the stock market, corporations, and the economy should give us a moment to pause. In the past, the market was a barometer of the health of the U.S. and global economies, and the financial health of the corporations that the stock shares represented. Since then, P/E ratios have given way to speculation, and stock market investing has succumbed to high frequency trading. Underlying fundamentals that were once the cornerstone of equity investment decisions are not a concern for financial institutions that trade rather than invest. A price movement of one cent can make a difference of thousands of dollars to these companies. The day traders relish the idea of getting in on the action and many execute multiple buy-sell transactions in the same day.

A DJIA high of 14,164 on October 9, 2007, preceded the stock market crash of 2008. The DJIA closed at 14,539 on March 15, 2013. In October of 2007, the unemployment rate was 4.7%. At the end of February in 2013, the unemployment rate was 7.7%. In mid-2008, subprime mortgage loans devastated the Government Sponsored Enterprises Fannie Mae and Freddie Mac. Today, the Federal Reserve is spending $85 billion a month in investments, of which $40 billion are in mortgage-backed securities, known as QE3. On October 9, 2007, the total outstanding public debt was $9,054,144,650,970. On March 15, 2013, it was $16,708,225,460,175; an increase of 84.5%. The average price for a gallon of gasoline on October 15, 2007, was $2.76. On March 17, 2013, the price was $3.68; a 33% increase. In 2008, the participation rate in the Supplemental Nutrition Assistance Program (SNAP), formerly known as the federal Food Stamp Program, was 28,223,000. In 2012, the SNAP participation rate was 46,609,000; a 65% increase over the 2008 rate. The negative parallels between the 2008 and current economic climate abound; yet the DJIA is 375 points higher today than it was in October of 2007.

In the past, investors had a choice of investment instruments. They could have an interest bearing savings account, an interest-bearing Certificate of Deposit, or they could invest in the stock market, among other choices. Since 2008, the Federal Reserve has kept interest rates artificially low. Interest bearing investments yield next to nothing. If investors want to make a return on investments, the stock market has become the only game in the casino. Those who are fortunate enough to have the ability to invest in the market are seeing a return. For many, the return they are yielding is more of a recuperative process from the ravages of the 2008 market crash. The Federal Reserve’s Quantitative Easing programs which are meant to artificially stimulate the economy does have unintended consequences. The dollar is losing value and inflation is becoming more apparent. The Fed applied the defibrillator paddles to the economy, jolting it with a dollar fueled feeding frenzy, and now they are saying they don’t know when to, or perhaps they don’t know how to, gracefully shut it off.

Now, the market feels comfortable again, like an old friend we haven’t seen for a while. In 2008, stock market investors felt a betrayed sense of trust and confidence. Now, a hint of greed eases the pain of betrayal. If current stock market activity has lulled the average investor into a “wealth effect” induced slumber, they need to delve into the financial news. Currently, well known investment firms are fighting to stop a stock investment loss that hovers at a billion dollars due to a corporation that has decided to go private and pay substantially less for outstanding shares. On May 6, 2010, the DJIA plummeted 1,000 points. This was only a part of the story of the 600-point drop and rebound, all occurring within less than thirty minutes. That thirty minutes cost investors hundreds of thousands of dollars. If you work with a candid financial adviser, he or she will tell you that stock market investing is the equivalent of legalized gambling. We should never forget that in 2008, we feared and felt betrayed by our old friend, the market.

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