Strength continued to soften this week with the 15-51 Indicator losing another 5%; it’s down 16% from its September 19th top. The Dow, while adding 1% this week, has shaved off 3% from its high point this year (October 5th). Both have posted modest gains for the year thus far. Here’s the picture.
End of year stock market activity is usually filled with all sorts of special events, from window dressing moves to pretty up year-end mutual fund valuations to speculation about what the holiday shopping season will bring – and this year, of course, the “fiscal cliff” and a heavy dose of political grandstanding has been added to the fray. Market turmoil has caused some investors to transfer assets from stocks to gold and cash. In fact, businesses and investors are sitting on huge sums of money. That’s why “the market” remains so soft and fragile, despite being over-valued near the action zone high.
Even though third quarter GDP was revised up fractionally, the recently released jobs number stinks. Workers leaving the job market outnumber jobs added by a 2 to 1 margin. About 25 million Americans remain under-employed – and that’s not good for the Market or the tax base. Remember, under-employed people require more government assistance than appropriately-employed people. The best way to cut government spending in this area is to put people back to work in large numbers – say adding 500,000 jobs per month. Current employment is performing way under that. Getting excited about a 174,000 job addition in November – the beginning of the holiday season – is a bit contrived.
People go back to work when businesses invest to expand their operations and workforces. Businesses don’t invest at random or ad hoc, but instead, when it makes the most sense to invest – when profits could be maximized and when future profits are worth the investment risks of today. And truth be told, the American Market is not an easy investment to make right now: It’s already a highly taxed market, and massive regulatory and legislative burdens are choking job creators. Business is difficult, and margins are shrinking; Consumers are strapped.
Not a good combination in any case – certainly not one investors seek out.
That’s why America is losing more jobs than its adding.
The easiest way to reverse course and draw idle capital from the sidelines is to provide cautious investors with incentive to take the associated Market risks and place high risk capital in the hands of entrepreneurs to create jobs and future profits. America doesn’t need higher tax rates on the same profits – it needs more taxable profits at lower rates. Higher taxes will discourage risk taking and new investments in products, plants, equipment, and innovation. Smaller government and more reward will encourage investment and broaden the tax base by expanding enterprise and putting people back to work.
But while market strength continues to soften, it continues to be politics as usual in Washington D.C. There is no talk of solutions to a lackluster economy. Instead, it’s all about higher taxes, class warfare, and a smokescreen called the “fiscal cliff.” What this Market needs more than anything is honest leadership and pro-growth policies. Sadly, both are in short supply right now.
Stay tuned…