Wednesday, June 30, 2010

Market Plunge

The Dow has shed nearly 800 points over the last couple of weeks and we can look to a plethora of reasons to blame for this.

Yesterday’s consumer confidence report was a major disappointment, falling dramatically and showing regional weakness obviously tied to the Gulf spill. The consumer confidence index fell to 52.9, a nearly 10 point decline the size of which usually corresponds with an economic shock. It sparked the huge sell off of 268 points on the Dow and over 33 points on the S&P 500 index. Consumers are now showing much more concern over the jobs market and over their income prospects. Those saying jobs are currently hard to get rose nine tenths to 44.8 percent. The size of this rise isn't overwhelming but the direction is definitely troubling - only the second negative monthly comparison since November. Add to that the expected monthly employment report Friday, which is presumed to show an increase in unemployment by 0.1 to 9.8 percent in June, and the picture gets uglier. More people see fewer jobs (20.8 percent vs. 17.8 percent) and fewer see more jobs (16.0 vs. 20.2). On the future income question, the unprecedented negative spread deepened between the optimists, now at 10.6 percent vs. May's 11.4 percent, and the pessimists, now at 17.2 percent vs. 16.4 percent. Consumers aren't going to be spending if they don't have confidence in their income.

Economically, worries about Europe are continuing to affect the markets. The euro, the common currency used by 16 European nations, fell to $1.2189. The currency has been seen as an indicator for confidence in Europe's economy following Greece's near bankruptcy and steep budget cuts around the continent to combat rising deficits. World markets have regularly dropped along with the euro in recent months. Greek workers walked off their jobs as part of another nationwide strike to protest the austerity measures the government put in place to try and reduce debt. The austerity measures were a requirement for Greece to receive a bailout from other European Union members and the International Monetary Fund. The new round of protests sparks fresh concerns about how well European countries will be able to stick to austerity plans in the face of public outcry against them. Investors have been worried for months that Europe's economy would grind to a halt and drag down the global economy with it.

On the home front, compounding the European situation, the markets have had a hard time adjusting to the President Obama’s intense regulatory administration. Although some feel these measures were long overdue, investors perceive these actions as bad for business. With health care reforms, financial regulations and a ban on offshore drilling, President Obama is only getting started. Next on the Obama's agenda is cap and trade, a green-house gas level reduction initiative that has failed to show any substantial results in a similar program instituted in Europe over the last five years. It may ultimately hurt the industrials and utilities along with card-check unionization, which could hurt retail and the banks.

With all the doom and gloom news circulating, what we can we expect next? On the short-term, technically, we see that the markets are very much over-sold and are due for at least a temporary relief rally. The professionals make a living by buying at the worst times, when investors are selling, and selling when everything seems fine (irrational exuberance) -usually when the public is buying near tops. Traditionally, July has been a good month for the markets, but it remains to be seen if we will get a summer rally. Whatever upside action does occur will probably be due to short covering for profit taking; most likely not due to positive economic or financial news.

C. Cohn
Cohn-Reilly Report

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