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Will the Stock Market Crash Again? Print E-mail
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Personal Finance - Investing
Written by Omie Ismail   
Friday, 21 May 2010 05:30
Concerned about the market? Well, you should be. It’s nail-biting time again on Wall Street. The troubles in Europe have spooked the market and with good reason. Once again we are reminded Stock_Marketthat no amount of shell games can change the fact that growth that is driven by excessive debt is not sustainable. Not in your household, not in Greece, and not in America. While it felt good to blast off from the March 2009 trough in the market, we always knew that eventually someone would need to pay the bill. In the U.S. that day of reckoning is some distance away, but the Greek crisis has reminded us that at some point even a massive borrower can get cut off. But does Europe’s problems mean that the market is going to crash or are we just in for a volatile ride? Here’s are some factors that you should consider.
  1. The Euro

  2. The Euro has plunged from $1.51 in December to as low as $1.21 this week. One of the chief benefits of a weak U.S. dollar was the boom in exports that has helped stimulate growth. It will also make it cheaper for the Chinese to import factory tools from Germany and France - making them even more competitive. U.S. companies also saw their profits boosted by overseas sales. With the declining Euro, those benefits come to an end.

High Unemployment

If you look at  a wider and more accurate gauge of unemployment that counts underemployed and discouraged workers, it tells a grim story - 17% are unemployed and in some parts of the country it has soared to 25%. Does anyone really think that real growth will occur at that rate? Thus far, the unemployed have been supported with state and federal unemployment benefits but how long can that last? We just started adding a reasonable number of jobs last month but the job recovery is fragile and employers will be quick to cut back on hiring if they feel that demand will weaken.

Consumer Confidence:

  1. Consumer confidence has been increasing over the last several months and has been for some time on an upward path. But with pay stagnant and jobs still scarce, it’s susceptible to reversal with any bad news. Right now the stock market was one of the few pillars of strength and consumers could at least feel the 'wealth effect' of a market that had risen up 60% from its bottom. That rapid rise eased the anxiety of consumers who had seen their IRAs and 401Ks obliterated. They might not be feeling so complacent right about now and that will further hamper the recovery. People thought the Great Recession was something to see in the rear view mirror but the crisis in Europe and the jitters on Wall Street reminds us that we’ve barely left the station.

 

  1. Real Estate:

  2. The real estate market looks like it has bottomed. But that was with the added stimulus of home buyer credits and recovering consumer confidence. Lasts month, defaults were 10% of all mortgages, a stunning figure. Anyone who understands the current dynamic however, shouldn’t be surprised. Anybody that is under financial pressure probably knows that they will get a much better deal if they default on their mortgage than if they keep paying. If you want a cheaper mortgage, first you have to show them that you can’t actually pay your bills. The slippery slope is starting to get steep. So it's hard to tell if these are economic defaults or just "strategic defaults" where people have the money but choose not to pay. Either way, it will continue to stress the financial sector.

Decline Isn't That Big (Yet)

  1. While many people will tune into the drama on CNBC, the reality is that the market is just back to where we were in February… and it’s only May. Many investors were just looking for an opportunity to exit and frankly, there was some froth. Probably the more justifiable concern is the level of volatility as was evidenced last week with a 800 point short lived plunge. But overall, right now the decline is very modest and we are still 50% higher than the trough.

Fear:

Market crashes happen for a variety of reasons, but typically they occur because the market finally wakes up to a series of underlying factors that create fear. In Europe, the fear became one of a contagion of smaller countries defaulting on their debt and being unable to attract new capital. This would begin to spread and threaten all of Europe and it's currency. In the last U.S. crash, it was the real fear that the financial industry was a house of cards and the entire economy would go with it. In some ways, the current fear helps the U.S. by driving investors to U.S. treasuries and driving down yields. Since the start of May, treasuries have fallen by about 50 basis points. On a trillion dollars of new debt, that’s $5 billion of annual savings. But the real fear that the market has always put off for another day is the one where the U.S., like Greece, increasingly has difficulty borrowing money. In some ways, Greece has helped allay any fears of that happening any time soon since investors are running to the U.S. to buy treasuries.

So will the market crash or is this just some profit taking amid global uncertainty? I wish I could predict that with absolute certainty, but I can’t and nobody out there can either. One this for certain is, it’s going to be a volatile bumpy ride for some time.


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