Yesterday and today the Dow Jones Industrial Average (DJIA) moved past the 10,000 mark. At midday today the average was 10,015. Many popular and mainstream news outlets are suggesting that the surge in the markets is a sign of the end of the recession. Pundits predict that the market is a good indicator of gaining momentum in the U.S. economy.
I don’t think your average business owner on Main Street agrees. Retail establishments may be hanging on but only by a thread. In many states September sales tax collections (a solid indicator for the health of retail) averaged 10 percent to 15 percent less than last year. At the same time the REAL unemployment rate (not just those who are collecting unemployment insurance) nationwide is averaging 17 percent, a level not seen since the end of World War II. Independent economists predict the unemployment rate may not peak until spring 2010.
In a terrible irony, it is bank and financial stocks that have driven the stock market higher over the last several days, but we haven’t seen the bottom of the banking crisis yet. Perhaps the few banks “too big to fail” have bottomed and are now on an upward curve, but regional and community banks still face several significant challenges over the next 6 to 12 months.
Regional banks (larger than $1 billion in assets without a national footprint) have a huge portfolio of commercial real estate loans that are loosing value as commercial borrowers are defaulting on loans at an accelerating pace. Several regional and community banks specializing in consumer credit card portfolios are seeing consumers defaulting at a rate approaching 20 percent. With these highly significant losses looming on the horizon for a few community banks and many regional banks, we are bound to see more banks fail in the next six months than in last six. We just past the 100 bank failure mark for the year. The FDIC has identified over 450 banks it has placed on its “watch list.” These banks are in weakened condition and subject to failure.
The crisis that started this recession, dramatic numbers of foreclosures in sub-prime lending, has shifted to mainstream mortgages as the unemployment rate rises. The number of home foreclosures passed an all-time high for the third quarter of this year ending September 30, 2009.
With all these measurable signs of continued weakness in our economy, why are investors jumping back into the stock market right now? If I knew the answer to that question. I wouldn’t be writing this blog. I would be counting all the money I was making in the market short-selling stock.
Some experts say the markets are a good predictor of the near-term future, but I think this run up in the indexes is wishful thinking. If I am right (the market indexes are going up because investors are following a herd mentality), then there will be more damage done when the potential market bubble bursts, and it shouldn’t take too long.