Week 36: Consternation Drives the Market

September 9, 2011 – Friday’s Child may be loving and giving, but this Friday’s market was downright miserable.  All seemed well for the week, until Friday came and the market erased the week’s gains with a 302 point drop in the DJIA.  The selloff has been blamed on a rumor that Greece would default over the weekend, despite the government’s denial.  (It didn’t happen.)  Adding to the markets consternation was the resignation of one of the European Central banker’s top guns, Juergen Stark who quit the post to protest the bank’s decision to buy Italian and Spanish bonds.  Some critics of the President, of which there appears to be a growing crowd, claimed the selloff on Friday was the result of the President’s Thursday night speech to Congress requesting $447 billion in tax cuts and spending initiatives to jump start the economy; however, such a reaction seems improbable and more political spin then a market getting spooked by a President’s speech.  

 While international affairs and political ramblings can sway markets, what seems at the heart of the issue is a growing unease.   These feelings have been festering for several months and fanned for political purposes, the media’s desires and by anyone else that finds value in promoting such discontent.  As Brain Belski, Chief Investment Strategists at Oppenheimer, wrote, “investors are acting as if it is a foregone conclusion that the U.S. Economy is in a recession again, Europe is shut down, jobs will never come back and systematic risk is rampant”.  I agree; however, what Mr. Belski fails to point out is how such feelings hurt the market and more importantly, why investors feel this way.

 Mind you, how one feels and how one invests, should never be combined.  Investors should be intelligent, not emotional.  If one has a feeling, they should study it to see if it is accurate, not jump at any whim that passes them by. 

 What investors are feeling can be best summed up by what Procter and Gamble is doing.  According to the Wall Street Journal (9/12/11: A1), “many of the middle market shoppers are trading down to lower priced goods” as the divide between have and have not consumers grows.  For multiple generations, Americans have always traded up, but now they are trading down.  While the disparity between the wealthy and the poor has been growing since the 1970s, it has not been until 2000 that the median income of full time workers has stagnated.  Since the 1970’s the median family income adjusted for inflation has stayed relatively flat.   In short, the American dream is under pressure and this is affecting investor’s appetite for risk.  At the same time, companies appear to be doing much better than the average American anyway you look at it. 

 What is going on?  And, more importantly, what do we do about it?  Are we simply in a phase, or is this a turning point (up, or down)?  These are the questions running through American’s minds.  It is putting them on edge and the volatility in the markets reflects these feelings.   With each news release, the outlook changes.    

 But if an investor can calm his emotions, he will look beyond the digitized hype and hyperbole and invest on what he knows, not on what he feels.  Walmart’s success in the 80’s and 90’s came in helping American’s by offering Always Low Prices, not by offering  premium products.  As wages stagnated, they found a way to meet the demand by offering products for less.  Of course this was done by buying overseas:  in 2007 Walmart alone was responsible for $27 billion in imports from China as trade groups complained that U.S. jobs were shifting overseas.  What this illustrates was that Walmart correctly saw how the retail market was changing and adapted.  Americans were not simply trying to save money by shopping at Walmart.  They were trying to get more for less: I think that it is safe to say that few people actually took the money they saved by shopping at a Walmart and put it in an account.  No.  They simply bought more.

 So while there is great uncertainty as to where the economy is going, there are also opportunities.  We may not like the times we live in, but for the intelligent investor there are opportunities. 


Week 36 Market Data            
    Market Close                    % Change
  12/31/2010 9/2/2011 9/9/2011   Weekly YTD
DJIA 11,577.51 11,240.26 10,992.13   -2.2% -5.1%
S&P 500 1,257.87 1,173.97 1,154.23   -1.7% -8.2%
NASDAQ 2,652.87 2,480.33 2,467.99   -0.5% -7.0%
Crude Oil ($ per barrel) 91.4       - -
Sources: Thomson Reuters; WSJ Market Data Group