01 June 2010

The Stock Market Has Double Dipped

The financial crisis has had aftershocks and the stock market demonstrates this fact.

First we had an initial bear market from peak October 9, 2007 to a bottom in March 2009, with a decline of 56.88% in the S&P 500. Then, we had a recovery, in which the S&P 500 rose 79.9% from March 2009 through April of 2010. Since April 2010, we have seen a second bear market decline from the April 2010 peak to the present.

We haven't at any time exceeded the October 2007 peak (it takes a 133% increase, more or less, to return to where you started after a 57% decrease in a market increase).

Why should ordinary human beings care? Maybe we shouldn't. The stock market isn't tighly connected to the real economy, particularly in the short term. We have had crashes in the stock market that have vanished just as fast.

But, the stock market remains an important leading indicator of the economy, especially when smoothed to reflect the fact that the real economy fluctuates less rapidly than the stock market.

Declining stock prices are also accompanied by declining commodity prices. This too is a leading indicator, and it is more closely tied to the "real economy" than the stock market:

The Journal of Commerce commodity index that includes steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century.

While a double dip bear market isn't necessarily the end of the world, a double dip recession is a very bad thing.

In other bad news, several important bits of federal government economic stimulus are going away.

The several hundred thousand temporary jobs created by the Census are rapidly going away.

State and local government summer jobs are also in decline as stimulus money dries up.

And, the first time homebuyer's credit, which caused people to push home purchases that they would have made anyway from after April to before April, is gone, which means that we will now see a temporary slump in home sales. The credit itself creates very few sales that wouldn't happen anyway and does so at a very high cost per additional sale, but it does have a powerful impact on when those sales happen. We have borrowed from the summer real estate sales market and now we'll have to pay for it.

Hold on tight. A expect talking heads on TV business shows to be uttering the words "perfect storm" any moment now.

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