While many economists have said we have come out of the recession, as of late many of them may be thinking we are heading for another one. A 512-point drop does not make anybody happy, especially me. It seems that we are back to the 2008 days of extreme volatility. This drop, however, should only be temporary. Our media outlets, whether it’s the newspapers, radio or CNBC, do not help the cause. Am I concerned? You bet I am. I am also, however, cautiously optimistic that this will be over fairly quickly. Much of this has to do with the problems in Europe; more specifically, the Global Sovereign Crises of Greece, Italy, and Spain are causing havoc in the global markets. Hopefully the ECB (European Central Bank) steps up and cleans up their mess. The U.S. attempted to assist with this problem with their approval of the debt-ceiling increase, though many of us think this was simply a band-aid so we can borrow more money. Time will tell if this is accurate. The S&P did downgrade our debt from AAA to AA+. I don’t think this was necessary or fair but now the U.S. has to deal with it. But back to this European debt problem, this is the worst crisis they have had in 50 years. 50 years! I guess there is good reason for concern. They need to do a couple of things: 1) Extend the loan maturities of their debts 2) Make major additions to bank capital 3) Allow the European Central Bank to purchase the outstanding debt on the secondary market. Decisions don’t seem to happen very quickly in Europe but the ECB needs to come to a conclusion on “how” to help out Italy and Spain. Becoming a lender of last resort would be a sound idea as well.
The significance of the drop is somewhat historic. The S&P 500 has only had three separate times (one week periods) in the last 37 years where the index has dropped more than 9.5%. This was one of those times. Even the coveted gold has lost its shine over this period shedding some 11.1% over this time period. Considered a safe haven for many investors, people are now wondering if they should sell this as well.
While much of this post is dreary and bleak, please do not panic. There is some positive news. The jobs report came out showing some 17,000 new jobs created in July, but zero jobs in August were added. The unemployment rate stayed at 9.1% for August. Retail numbers have started to rise due to increased consumer spending. In addition there seem to be more homes slowly being built as we try to leave the foreclosure buying-spree behind us. Oil and gas prices are still high but they have come down from their peaks. While it would be nice if we didn’t get hit with multiple issues all at once, it seems to be the norm. “Be patient” has been advice given to me many times and I think it applies here too.
