by John M. Curtis
(310) 204-8700

Copyright Nov. 1, 2009
All Rights Reserved.

              Following other global stock exchanges, the Dow Jones Industrial Average plummeted 2.5%, taking profits from an unprecedented run-up, driving world’s most prestigious index from its March low of 6,500 to its October high of over 10,000.   Oct. 29’s nearly 2% gain was eclipsed by Oct. 30’s 2.5% drop, signaling that market-makers wish to take profits before an expected year-end rally.  While experts debate the health of the economy, Wall Street seizes the opportunity for a correction, pushing stock prices down to more affordable levels.  No commodity—whether tangible or intangible—can escalate in price too much before it’s priced out of the market.  Stocks are no exception, where current valuations got ahead of the real Gross Domestic Product.  Oct. 29’s Q-3 GDP of 3.5% triggered a one-day market rally, only to be brought down to reality by real economic growth.

            Consumer spending, believed to be 70% of real GDP, showed no pulse heading into what could be a disappointing holiday season.  Most economists attribute Q-3’s 3.5 GDP number to President Barack Obama neo-Keynesian’s economics, where artificial government spending drives the economy.  White House officials credit Obama’s $789 billion stimulus plan for temporarily juicing up the economy.  With the Federal Reserve Board tapped out of printing cash and adding to a ballooning the national debt, economists believe it can no longer rely on government stimulus.  Fearing less stimulus slows the economy, Wall Street took profits, driving share prices down to more affordable levels.  Next week’s jobs’ report also weighs on today’s sell off, where expectations about growth remain weak.  Ten-percent unemployment bodes poorly for consumer spending.

            Looking at the big picture, Wall Street can only do so much to stimulate the economy and put cash into the pockets of publicly-traded corporations.  Publicly-traded companies must also have earnings based on selling real goods-and-services.  Whether selling autos or iPods, companies can’t sell without cash-rich consumers.  White House officials acknowledged that economic stimulus plan saved about 650,000 jobs, far fewer that the 1-2 million originally promised.  Reducing unemployment is no easy job when you consider that real earnings require consumer demand.  Federal Reserve Chairman Ben S. Bernanke’s monetary policy has already dropped interest rates to rock bottom, trying to juice the economy.  Fed policies, both loosening credit and lowering interest rates, have devalued the U.S. dollar, hoping to encourage more exports and domestic spending on U.S. goods.

            Wall Street anticipates slower economic growth by selling off.  Lower stock valuations enable the market to continue moving up to a certain technical inflection point, where shares can’t sell.  Bargain stock prices allow fund traders to buy-in, when they take positions for another eventual sell-off.  While long-term investors stay put, the major funds work the market by buying-low-and-selling-high.  When stocks get too pricey, they must sell-off before looking attracting again to new funds.  Commodity prices are no different.  Despite a devalued dollar driving up commodity prices, like stocks, can only rise so far before they’re no longer sellable.  When New York Mercantile Exchange traders drove oil prices to $147 a barrel July 12, 2008, U.S. pump prices peaked at nearly $5 a gallon.  When consumers stopped driving and gasoline inventories swelled, the bottom fell out of oil prices.

              No matter what the economic news, Wall Street takes profits and drives down stock prices when the market is over-bought.  Given the weak state of consumer spending, the market couldn’t sustain the Dow at 10,000.  How much the market corrects is anyone’s guess.  Judging by other corrections, the market could roll back to 9,000.  If it only sheds about 10% or 1,000 points, then it could exceed 10,000 by year’s end, only to see another correction in early 2010.  Billionaire investor George Soros warned about a dreaded double-dip recession, when Obama’s stimulus works its way through the economy.  Whether accepted or not, Barack’s Keynesian approach can’t replace an economy built on real supply-and-demand.  PIMCO’s CEO Mohamed El-Erian expects a downward Q-3 revision and more GDP problems in 2010, something echoed by Treasury Secretary Tim Geithner.

            Real GDP growth can’t improve until publicly-traded and private corporations begin adding jobs.  Looking ahead to the holiday season, consumers will sit on their wallets until unemployment finally begins to improve.  While the University of Michigan Consumer Sentiment Index held at 73.7, it’s expected to drop back into the 60s when the stimulus runs out.  With the economic outlook uncertain, consumers can expect more choppy water in the stock market, the best barometer of future economic growth.  Whatever happens to GDP and unemployment, investors can expect more buying on dips and selling on peaks.  Regardless of the economy, Wall Street knows how to survive in tough economic times.  Market corrections create new buying opportunities, signaling that overvalued stocks could come crashing down.  Investors shouldn’t get too spooked this close to Halloween.           

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.