2009 all over again? Stock Market gets this one Wrong.

I've been dying to write a discussion the last couple of days about the economy and the stock market.  When the stock market dives like this, I find it hard not to watch MSNBC and the like.  Although brutal, watching a train wreck in slow motion (or not so slow) is hard not to watch.

 

Why is the Market Headed Down?

 

Maybe I'm immune, but the latest stock crash doesn't have me spooked.

I've been fascinated by watching the various opinions out there to answer a simple question: Why have stock investors gotten so bearish?  Many - although not most - have suggested that this is deja vu- 2009 all over again.  Bank stocks have been getting hammered, so it certainly looks like the investing public has bought into to some version of that story.

 

I think that's ridiculous.  There are so many differences!  Let's look at some.

 

Differences between 2009 Economy and Now

 

There are huge, enormous, differences between 2009 and now, and although I could probably write the longest column ever, I won't so here's a summary.

 

2009

-Banks over-leveraged (too few assets, too many loans)

-Banks unaware of total amount of risky assets on the books

-Foreclosure numbers/non-payment numbers on home loans headed up

-Home prices falling fast

-Massive Job Losses; unemployment headed up

-Interest rates high

-Oil high

-Government and other economists openly talking about "depression", "credit crisis"

-Major institutions collapsing (AIG, Lehman Bros, and many others!)

-Companies posting losses instead of earnings

 

2011

-Banks leverage has been brought way down

-Banks very knowledgeable about assets and risk allocation

-Foreclosure numbers headed down

-Home Prices headed down, but very slowly, and stable/moving up in many more markets

-Job Gains

-Interest Rates Low

-Oil Falling, getting close to low.

-Few experts talking about a credit crisis or depression, at least in USA (Europe is another story...)

-No Major collapses- and most bank vigorously defending their balance sheet with facts.

-Companies posting record positive earnings.

 

I'll be the first to tell you that in 2009, I felt we were standing at the edge of the economic abyss, and, as ugly as things got I think most people are aware they could have been far, far worse. Like 25% unemployment worse. It was really shameful how unprepared these (very wealthy and greedy) banks were about the loans they were writing just so they could line their pockets.  But the truth is most banks began addressing many, if not all of those issues after the 2007 sub-prime shock - the first real indicator that credit had gotten way too loose - and that was a long time ago.  There really isn't anything that I can see that makes 2011 look like 2009, except for, of course, the stock market plummeting. Unlike 2009, I expect companies to keep posting good earnings, and with bond yields basically at zero in most stable countries, I expect capital to come back to the market. Which reminds me, about that stock market....

 

Most Economists Will Tell you The Stock Market Means Squat

Stock Markets trade on expectations- not realities. This is easily forgotten though, especially when your very REAL money is disappearing. But since they don't trade on realities we see odd behavior in the stock market. It has (often) grown when the economy was still heading down, and it has pull backs during growth phases. Although it destroys wealth, it doesn't directly destroy jobs, or consumption, or affect earnings. The market has an effect on confidence, but an indirect one.

 

And When in Doubt, Look Around

How bad was 2009? I could go a week without my phone ringing. And I log some serious minutes even when things are so-so. So how about now? I am as busy as I've been in five years, so if the tone of this blog is optimistic, it's because I know a lot of folks who are buying and selling houses, and the rates (3.99 for a 30 year fixed this morning) are going to keep things moving. I don't welcome the stock market crash, but I think the economy is better than people think (and so does Jamie Dimon, CEO of JP Morgan Chase Bank, and I'm sure Warren Buffett does too). Let's hope it pans out that, as one credit crunch is enough for my lifetime.

 

Matt

 

 

 

 

Do Good Things Today!

Matt Heisler