Early Retirement Blog

A Stock and Bond Trader Scratching His Bottom

This article has been getting a lot of hits, everyone wants to know, when will the stock market and economy hit bottom?  When will house prices stop falling?  When will layoffs end?  When will the stock market and economy begin to recover?

The last eight years of growth in the U.S. economy were caused by a credit bubble.  Easy credit, mainly from home equity, fueled a consumption boom which also created a stock market boom.  The last eight years of growth, since the dot com bubble bust, were entirely imaginary.

Not until we return to 2001 values for both the housing and  stock market, will the economy hit bottom, and be able to begin a recovery.  And guess what? We’re almost there.  Let’s talk bottoms.

Stock Market Bottom
In fact, in the case of the stock market, we are past a bottom – an over correction has occurred.  The dot com bubble bottom, was set in July of 2002 when the Dow Jones hit 9,000.  Today, the Dow Jones average is at a May 1997 level of 7,300.   The over correction is probably due to the drag on the Dow Jones 30 from BofA, Citigroup, and J.P. Morgan, bank stocks which have been deservedly hammered.

Housing Bottom
From 1978 until 2000, the inflation adjusted median home price in the U.S., was valued between $150,000 to $175,000.   The latest National Association of Realtors data reports that for December 2008, the Average Median Home Price in the U.S was $175,000,  indicating that home prices may be at their bottom.   Don’t be surprised if home prices over correct as well, and we have a few more months of declining home values, before a true bottom is reached.   Even though home prices continue to decline, home sales are increasing, a good sign for the housing market.

Other Bottoms
An unemployment bottom lags behind a stock market bottom, which makes sense, corporations will not begin hiring again until their stock price stops falling. Once corporate stock prices begin to recover, corporations will continue to resist hiring for a number of quarters, to maximize their profits.   The unemployment rate which stands at 7.6% today, will most probably surpass an unemployment rate of 9.7%, which the U.S. experienced during it’s last prolonged recession in 1982.   Due to the severity of our current recession, the unemployment rate this year could reach 10% or more, before it starts to decline.

Oil has fallen like a rock, from $145 per barrel a year ago, to only $35 per barrel today.   This is a significant decline that will help corporate profits, increase consumer discretionary spending, and reduce the threat of inflation.   It is not enough.

The historic average price of oil, where economic growth can occur in a consumption based economy, is between $15 and $20 per barrel.   An argument can be made that the current price is fair, and reflects the increased demand from China and India, however I would be happier with a price in the mid-20′s.

The psychological bottom will be reached, when good news starts replacing bad news, and people begin to regain confidence in the economy.   Because economic numbers are compared to the previous year’s number, statistically good news will not start appearing until December 2009, one year and one quarter after the stock market collapse of September 2008.   Continued rising unemployment and weak home prices, will keep Americans anxious and less likely to increase spending, for the remainder of 2009.

Other Factors
Wars, political instability, fears of protectionism, country debt defaults, and other factors can have an over-riding negative effect on economic recovery.   It appears though, that the Obama administration understands the economic impact of U.S. foreign policy, and is moving to correct current problems and avoid new ones.   Witness Hillary Clinton’s visit to China, a successful sales trip for the Obama Stimulus Bill, which requires the purchase by foreigners of hundreds of billions of dollars in U.S. Treasuries.

Even though the U.S. is at or near a technical economic bottom, at least where housing and the stock market is concerned, it will take some time before the average American feels their individual bottom.  However, the combination of Obama’s Stimulus Bill and Housing Relief, should reduce the amount of time before Americans feel their bottoms and pull out their wallets, creating economic growth and recovery.

The bottom line on the economic bottom? The stock market is technically at a bottom, the housing market is almost at bottom, unemployment will bottom around December of 2009, and economic growth as measured by GDP should start rising in the first quarter of 2010.   This prediction of an economic bottom assumes that nothing changes between now and then.

You may have heard of “Dr. Doom”, Nouriel Roubini, who accurately predicted the economic collapse?   My friends call me “Mr. Worst Case Scenario.”   I predicted the global economic collapse three years ago.   Like Dr. Roubini, I tried to warn everyone, even though no one cared to listen. The economic bottom I have just described is the best case scenario.

This is a retirement blog, if you are close to retirement age, do not waste your time trying to predict bottoms and recoveries.   Two years ago I wrote an article titled “Retire Now or Never” , encouraging everyone to hurry up and retire.   And a month before the September 2008 stock market collapse, I wrote “Retire in a Recession“, explaining how you can end up wealthier by retiring during a recession, instead of delaying your retirement. If you are close to retirement please read it.

One last thing – Wall Street uses a formula that over-estimates your actual retirement savings needs.   Wall Street earns big profits, through commissions and fees, by keeping you working.   Many people are in a position to retire, and because of Wall Street, are unnecessarily delaying their retirements.   Do yourself a favor, find out how much savings you really need, by using the Free Retirement Planning Calculator.

Update September 2010
The actual stock market bottom occurred two weeks after this article was published.  Following the stock market bottom, the S&P 500 increased in value by over 50%, before flattening out.  Unfortunately, the housing market and employment, although hitting their bottoms, have not seen improvements.

Also Read:
When Will The Double Dip Recession Start?
How to Save $1 Million
How to Retire Early