Special Report

December 6, 2011 by Phillip Gottelf / Tags:

What about the Bad News?

The Wall Street Journal front page carries the story, “Layoffs Deepen Gloom,” and the DOW Jones Industrial Average continued zooming upward this morning on prospects of a debt ceiling compromise. The apparent disconnect between the faltering economy and investor enthusiasm raises an important parallel between the current stall and the devastating 1932/33 market plunge into the abyss. Like the 2009/10 rally, equities moved impressively higher from 1929 into 1930, regaining approximately 60% of the loss within about eight months.

As credit continued to be unavailable to small businesses and consumers, and unemployment mounted, the economy simply imploded from 1931 to summer 1932. There was a sharp summer rally in 1932 that was presumed to mark the bottom, but the economy was unable to regain footing until late 1933. Consider the current DOW weekly continuation chart.

We see that the average has recovered 80% from the 2009 bottom, however, there is a catch. The DOW in 2007 was substantially different from the reconfigured index. Companies that lost their listings were replaced, and the index has been noticeably altered. Using the prior component stocks, the DOW remains in miserable shape.

Using the broader S&P 500, the recovery from bottom to current is 76%. The bright spot would be the Russell 2000 which has fully recovered. While performance should be encouraging, the lack of progress in employment and housing signifies a lack of consumerism… the driving force behind the U.S. economy and other economies that rely upon the U.S. consumer for their livelihoods. Thus, even the sizzling economies of China and India could be adversely affected by the lack of U.S consumerism through 2011.

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