Stock Market Close: Depression Fears And What To Do Now

THE FINAL NUMBERS - Trend is Lower

NEWS: The S&P 500 (^GSPC) and NASDAQ (^IXIC) did not trade at new multi-year lows, but they did close at fresh lows. The S&P 500 lost 58 points or 6.1% as the NASDAQ tumbled 80 points or 4.8%, even as Apple (AAPL) rallied on last night’s earnings report. The Dow (^DJI) held above its early October closing low with a late afternoon bounce, though it did finish down 514 points or 5.7%.

THE BOTTOMLINE: From a technical view, the breakdown today of the S&P 500 and NASDAQ was not good news. There is no way to sugarcoat an index closing at a fresh multi-year low. The only little glimmer of hope from today’s action was the fact the intraday lows did not break those of earlier this month. A break below the intraday lows will result in another sizable wave of selling and could result in another 5% on the downside form current levels.

Long-term investors should continue to remain cautious and hold off on buying any new investments until the economic landscape proves more stable. The barrage of earnings this quarter has been okay at best, but the troubling aspect is the extremely cautious outlook. As I mentioned yesterday, it makes no sense for companies to be optimistic because everyone is cautious and they should be as well. Once we get past earnings I believe the market will then be able to turn its focus to the oversold conditions along with long-term fundamentals. It is clear the credit issues are improving as LIBOR fell again last night to the 3.5% mark, from a high of nearly 5.0% a mere two weeks earlier. With credit panicking and earnings in the past, the only other concern would be a global recession, which I believe we are in, however I believe this has already been discounted by the market and its 44% pullback from the highs last year.

Until we see more stabilization in the economy and the stock market please continue to sit on your hands OR implement a hedging strategy. We have several here at PFG that we will likely considering implementing again if the indices cannot hold the October intraday lows.

The Next Depression?

NEWS: The depression of the early 20th century and the current economic situation have drawn a fairly large amount of comparisons from the bearish camp. While it makes for great headlines on MSNBC or CNN, it cannot be further from the truth.

THE BOTTOMLINE: I can throw all types of stats at you that make my point, but as you know, numbers and be maneuvered to make a point for either party. Therefore I will give you only one stat and some real-life examples. Unemployment hit 25% during the depression and the most recent reading was 6.1%. I will agree with the bears it could rise a little more, but NOWHERE near that of the depression.

Real-life example: Apple announced record sales of iPhones last night and there have been lines waiting for the new phone when it was released. If I remember correctly, during the depression the lines involved waiting for bread handouts, not state of the art technology which cost a couple hundred dollars.

Real-life example: This year 15 banks have failed in the US. In 1933, 4000 or over 26% of all banks were either suspended or failed. The number of 15 is a mere 0.17% of all FDIC-insured banks in the US; to match the depression in bank failures the number would have to skyrocket to 2243!

The point I am trying to make is that it appears to me we are in the midst of a normal (not mild or severe) recession that occurs every few years and will end in the very near future. When we look back at this “panic” time the proverbial, “I shoulda bought….” will come out of our big mouths.

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