What If?

By Bob Wood, MMNS

As I write this column and October ends its second week, I continue to hear “the bottom is near” in the enormous sell-off hitting stock markets around the world. One market participant said that today, October 10, would mark the bottom for stocks and present a wonderful buying opportunity.

But what if our domestic market does not bounce back?

In previous columns, I have included remarks from bearish market observers who correctly anticipated the housing market turmoil and credit crisis. A couple of them argue that the worst is still to come. What prevents the credit markets and our stock market from totally crashing, they say, is massive, unanticipated governmental intervention — around the world.

In the U.S., underlying economic fundamentals are worsening by the week. Auto sales have hit the skids, and only the most bearish among us would have thought that possible. Job losses are ramping up, with larger numbers seen for every month this year. So what is going to help bring back a growing economy that produces more jobs — and helps the housing market recover?

Perhaps the only possibility for a housing recovery is lower prices, but, then, those on the selling side of such transactions would obviously suffer. Spending will have to improve to create new jobs, but from where does the consumer draw resources for additional spending?

Investors watching their savings drop precipitously are hoping to hold on to whatever is left, rather than deciding how much more they will spend. And with trillions of dollars lost in both the housing and stock markets, spending will undoubtedly remain constrained for a long time to come.

A lack of spending on discretionary items bodes ill for corporate profits. Those in conservative circles who have argued for lower wages, outsourced jobs and weaker unions now see the results of all they asked for, and more, from this and past administrations from both parties. Now they reap what they’ve sown in terms of weakened consumers with little ability to increase spending and limited capability to maintain their previous spending habits.

Our government is, at least technically, insolvent, and reliant on simply printing the money needed for its spending. Consumer debt has risen to levels that will be very difficult to repay — even in a growing economy. Consumer installment debt is almost $2.6 trillion — and climbing. And how much of that amount do consumers still owe for assets bought — such as a car or other similar items — that are now depreciating in value?

At the same time, workers are too stressed by fading wages and rising costs of living to add money to their 401(k) or other savings plans. Contributions have fallen off this year. But hardship withdrawals are rising, so accumulated savings for many workers have dropped as they near retirement. What does that situation augur for their future spending?

With the S&P 500 still selling at a premium in terms of its long-term valuation average, current market plunges should not come as a total surprise. Yet even with my long-time bearishness on domestic markets, I am taken aback at how far and fast our U.S. markets have fallen.

At the same time, international markets have been beaten down even faster than the U.S. market. But, in many cases, with their stronger economic fundamentals, especially in countries not experiencing housing bubbles and/or sub-prime lending crises and still enjoying strong exports, those markets should rebound nicely over time.

But what will be the catalyst for a rebounding U.S. economy? And what will boost profits at our larger companies with the economy suffering from so much lost wealth and income?

I wish I could answer those questions, but I, like many others, just don’t see apparent answers. The massive deficits created by the current administration with its corruption, boundless over-spending and reliance on deficit spending will deny us whatever legitimate governmental assistance we might have hoped for. Imagine how much different our current financial situation would be if this Bush administration had maintained fiscal policies initiated under the Clinton team and the nearly-balanced budgets resulting from them?

So what happens if the worst predictions from those realists who saw this mess coming do, indeed, come to pass? Could we see our own version of what has been unfolding in Japan over the past two decades? On October 10, the Nikkei 225 hit yet another new low of 8,276. Its previous high, seen at the very end of 1989, was 39,000!

That market, in the world’s second-largest economy, has fallen almost 80% from its prior peak nearly 19 years ago! Could that happen here?

Obviously, I have no clear idea as to how our markets will fare in distant years, but I am sure that no one in Japan guessed 20 years ago that their stock market would offer only ongoing losses for such a long period of time. Now, how many are guessing that the same pattern could occur in our domestic markets?

The stock market in Japan has become nearly unworthy of investment. And to be honest, this past decade has offered nothing but losses for most investors in U.S. markets; those with winnings, for the most part, were invested internationally and in commodity sectors.

Surely, we will see periodic rallies in domestic markets. We’ll see them, from time to time, even if they result only from impetuses such as current thinking that an important low should be near and that stocks have fallen so sharply that investors will now scoop up whatever appears to be bargain-priced shares.

But can we expect a sustained bull market cycle? I just don’t see that happening. Look back at the bull market cycle that began early in 2003, after the onset of the secular bear market and resulting lows in late 2002. Virtually all of those gains have been wiped out in the past year.

Investor portfolio values have fallen back to where they started in 2003, at the beginning of the bull cycle. Yet when we consider inflation, they are down further in real terms. This market has been a big loser for the past 10 years and counting. At what point might investors in the U.S. market adopt the mindset of Japanese investors, who now think of their stock market as a casino rather than a safe or smart place to risk savings?

With Wall Street’s reputation at a generational low level, who will trust big banks and brokers with their savings, especially as they get closer to retirement? I believe investors will become much more conservative in future years, and the stock market could become nothing more than a trading game for the very rich.
Surely, this column has been unsettling to read, but we must be aware of reality – and history. But, clearly, many other markets did very well over the past 18 years while Japan’s market produced only losses, so bull markets will be active somewhere. With the dire financial situations existing now in the U.S., I fear those bull markets won’t happen here, in any meaningful, lasting way.

Have a great week.
Bob

Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., invest@muslimobserver.com.