Still hung-over by recent Supreme Court missteps, the stock market reflected my blahaissez-faire sentiment in a mish-mash of trading. After losing almost 400 points in six consecutive down sessions, the Dow Jones Industrial Average got half of it back on Friday, ending up 204 points. The Average eked out a 1% gain for the week while stock market strength adjusted down by a fraction.
In the news, the world continues to move upside down. Economies in the Euro Zone posted their fifth consecutive month of business contraction and France is following cues from Spain and Italy – drastically cutting government healthcare and education programs for the poor while raising taxes on the rich. Market conditions in Syria are down-right ugly and the U.S. is building a stronger presence in that region. And more evidence came to light that China’s economy, the world’s second largest, is increasingly moving towards recession.
As if things weren’t bad enough, the global financial crisis hasn’t gone away. After cutting ratings on five of the six largest U.S. banks, Moody’s Investor Service cut the scores of 28 Spanish banks. With skyrocketing interest rates already, Spain can ill afford another rate hike – which is right around the corner.
In a sharp turnaround, the European Central Bank (ECB) announced that they would impose losses on senior bondholders of sovereign banks in the region. Senior bondholders are the most significant class and are usually the last to take losses. But when that time comes, as it has in Spain, bondholders lose money and interest rates rise even further. Investors who own high yield fixed income mutual funds ought to take special note.
Here at home market fundamentals continue to be negative: unemployment is still 8.2%, government welfare programs are growing at unsustainable levels, and it seems like banks are making news everyday. From the probes and settlements at Barclay’s and Goldman Sachs to the debacle at JP Morgan Chase (where trading losses now amount to $6 billion) the financial market looks completely undisciplined and dysfunctional. This, of course, is not to mention that a few U.S. municipalities have gone the European way by recently filing for bankruptcy. There will be more to come, sad to say.
The below chart is indicative of times like these. In the past five years, Gross Domestic Product has shown absolutely no signs of life; the Dow continues to indicate recession, and gold is consistent with a weak currency environment. Here’s the picture.
As the 15-51 Indicator clearly shows, stocks remain over-valued at these levels. Remember, the stock market has not yet realized recession has arrived in America. When it finally does – valuations will swiftly correct.
Stay tuned…