Psychologists have uncovered a fascinating phenomenon about people at the racetrack. The moment after placing their bet on a horse they become much more confident of their horse’s chances of winning than they were immediately before placing their bet. Is it possible that the very same thing happens the moment we invest in a stock or a mutual fund?
How many times and in how many situations lately have we heard the familiar refrain we’ve never seen anything like this? Whether the subject is politics, housing, jobs, stocks, sovereign debt, corporate ethics, or American wars, experts find themselves unable to find comparison or remedy. Having no historical frame of reference makes us anxious. We naturally prefer familiarity over the unfamiliarity. We like trends and historical context on which to base our projections. We do not like unproven ideas.
There was scant positive news this week offering hope to those still optimistic the US and global economies can avoid a recession. The government’s third and final revision of economic growth (GDP) for the second quarter was revised up to 1.3% from 1%, however still quite anemic. German lawmakers quelled short-term fears by approving an expansion of the euro-area rescue fund which allows European policy makers to focus on next to blunt their debt crisis. They will likely leverage the fund as the US did in its own crisis in 2008.
Where there was considerable unity among world leaders at the outset of the Great Recession, the latest economic retreat is preceded by worsening splits and schisms. The scant fiscal and monetary responses so far lack not only coordination, but real long-term effectiveness. At home, our government is divided into three incalcitrant ‘parties’ each defying leadership and each seemingly oblivious to the costs of delay. Across the pond the European Union teeters on the brink of not only recession, but potential disintegration.
It has been a week of dimming hopes. More economists now believe the US will slip into recession over the next twelve months. As the president stumped across to country to sell his jobs bill to the American people, Congressional support quickly waned on both sides. And indications that Greece will default on its sovereign debt combined with the worsening undercapitalization of European banks stymie efforts by Germany and France to hold the Euro region together.
Last night the president laid out a $447 billion jobs plan which includes continuing the holidays on some existing tax cuts as well as adding some new employer-side cuts. More than half of the plan is focused on tax cuts while another $105 billion goes to infrastructure renovations including school modernization, transportation projects and rehabilitation of vacant properties.
If you have any exposure at all to the US economy, whether you run a corporation or you are raising money for the school PTA, you have no doubt noticed a certain reservation among people to spend, invest, or give their money. August proved a tough month for the economy. Confidence crushers such as the debt ceiling debate, the unprecedented downgrade of US Treasuries from AAA to AA+ by Standard & Poor’s, a plunging stock market, an earthquake strong enough to suggest attack for many in DC and NY, and an east coast hurricane that literally quieted the “city that never sleeps” all fueled a growing sense of pessimism.
Today, the government revised its assessment of the US economy’s growth for the second quarter downward more than economists expected this morning. GDP grew at only 1%, down from a previous estimate of 1.3% in July. But the underlying numbers were more positive. Final sales of domestic product improved to a 1.1% annualized rate from 0.0% in the first quarter. Capital expenditures were revised to 7.9% from 5.7% and non-residential fixed investment was revised to 15.7% from 8.1%.
A headline which appeared on Bloomberg’s website yesterday “Stock Volatility to Leave Lasting Scars on Investors’ Psyche” highlights a concern that a growing number of investors are leaving stocks for good. Last week the S&P experienced an unprecedented four-day span of volatility in which the large-cap index fell and rose by at least 4% each day. In a panic, investors pulled $23.5 billion from US equity funds, the most since the financial crisis began in October 2008, according to the Investment Company Institute.
Since the slide in equity prices that began July 22nd, US stocks have lost some $2.8 trillion dollars in value and roughly $4 trillion worldwide. Following yesterday’s rally, the MSCI Total US Market Index is down 13.5% and the blue chip Down Jones index is down 12.1%. Investors slugged it out this week as news gyrated on earnings, interest rates from the Fed, jobs data, and European bond woes. The Dow experienced an unprecedented four-day ride points-wise; down 634, up 429, down 519, and up 423.