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VERSACE: Economic indicators explain stock market’s slump

- The Washington Times - Friday, January 29, 2010

OPINION/ANALYSIS:

As I write this week's installment of "Your Money, Your Way," the stock market has posted several days of consecutive declines, which in aggregate equates to a fall of 5 percent for the S&P 500 since Jan. 22. On a year-to-date basis, that basket of stocks is down a more meager 3 percent, but far off its January high, in which it was up 3 percent.

Over the last few weeks, I've touched on several concerns that I thought would weigh in on the stock market - earnings expectations that were too aggressive, flat average workweek and overtime hours that did not bode well for job creation, and how several leading and coincidental economic indicators (like freight traffic and truck tonnage) have yet to inspire confidence in a pronounced economic turnaround.

More recently, the nonpartisan Congressional Budget Office announced the pace of the U.S. economic recovery would be slow and that the unemployment rate will average 10 percent through the end of fiscal 2011. Now let's layer on fresh job cuts, weekly unemployment claims that were higher than expected, and a number of companies that have either missed expectations for their December quarter results or have ratcheted back their 2010 outlook. It becomes very easy to see why the stock market has retrenched in recent days.

If we wanted to take a more comprehensive view, we should consider a few more things. First, from its March 2009 lows, the stock market has made an incredible upward move, and some, including me, would argue that it has come too far too fast, particularly given the recent rash of economic and corporate gleanings. Another aspect to consider is the recent furor over the bailout of AIG and the role of both the New York Federal Reserve and the Treasury Department. It would then of course be unfair to forget that several cable news channels eagerly (though unsuccessfully) tried to bring down the renomination of Federal Reserve Chairman Ben S. Bernanke to a second term. These populist fits stoke uncertainty in the stock market, and as I have mentioned several times, uncertainty spooks the stock market.

With that in mind, President Obama delivered his first State of the Union address to the nation this week. There is no doubt in my mind that Mr. Obama is a gifted speaker who can capture the mood of the nation and paint a compelling picture. That said, however, I found the address too long on ideas and short on how those ideas would be implemented. There is no doubt that Main Street is hurting: We need only look to recent polls over consumer spending habits (down), percentage of people thinking the economic outlook is getting worse (higher) and concern over whether or not people can find a quality job (hard to find) - but the stock market abhors being short on details. While pandering to Main Street, including citing large bonus payments while the average consumer is hurting, may be politically smart, what I find particularly interesting, per Gallup findings, is these speeches rarely move presidential approval, particularly in a positive direction.

So what do we do here with the stock market under pressure? We retest the reasons why we own the stocks and other investments that we do and re-examine the underlying data. For those that are no longer supported, the professional investor would be taking money off the table to build cash in order to take advantage of attractive pricing to average down their cost basis in those companies where the data holds.

Be careful, as there is a smattering of information to sift through in order to make a well-informed decision. Case in point, this past week we heard from Apple, RF Micro Devices, Qualcomm, Motorola, Nokia and HTC, all of which participate in the mobile handset market. Each of those companies had their own outlook that we must ponder as we update our own perspective on what is going on in that industry and which companies are positioned to win or lose.

There are two easy traps to fall into when investing in an environment much like the current one. The first trap is being too emotional when it comes owning a stock. Stocks are investments, and as such need to be scrutinized in a cold-blooded manner, not as something to fall in love with. Being too emotional often leads to the second trap, which is "chasing a loss." Simply put, this is when an investor ignores current data and essentially puts on blinders as he or she looks to recover as much of their loss as possible, rather than cutting his or her losses in a disciplined fashion.

As always during earnings season, keep your eyes and ears open.

Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston, Va. He can be reached at cversace@washingtontimes .com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.