In the first half of 2008, the S&P 500 fell 12%. June's stock market was the worst since 1930. So are stocks now a screaming buy or are they poised to plunge further? Nobody knows. But my guess is that stocks will move based on how well they perform compared with expectations. And the risk of negative surprises in most industries exceeds the chance of positive ones. So stocks will probably keep falling.
Here's a quick review of six negatives:
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Oil prices. With oil at $142, up 492% since January 2001, consumers are paying about $4.10 a gallon for gas and companies that use oil are getting squeezed while trying to raise prices. An attack on Iran, a big oil supplier, looms on the horizon. This and other geopolitical uncertainties could put further pressure on oil.
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Housing. Three million people are expected to face foreclosure on their homes. And prices have dropped 15%. Since people were using home equity to finance their purchasing, their negative equity is sucking the wind out of the economy.
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Tight credit. Banks are facing huge write-offs thanks to their $500 billion in Level 3 assets -- those that have no active market. And they are struggling to raise capital at a time when they are in particularly deep trouble. In light of that, banks are freezing consumers' home equity lines of credit and otherwise making it difficult for them to get access to debt.
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Unemployment. The New York Times reports that Goldman Sachs (NYSE: GS) expects the unemployment rate to hit 6.4% in late 2009, up from the current 5.5%. Workers who aren't working tend to cut back on spending and they can't easily get access to credit.
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Stagnant incomes. The median income has fallen from $61,000 in 2000 to $60,500 in 2007. With flat incomes, consumers can't make up for higher prices by borrowing so they are cutting back on everything that does not involve paying for gasoline, feeding their family, and heating or cooling their homes.
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Corporate earnings down. As I posted, earnings at S&P 500 companies are expected to be down 11% for the second period, led by a 60% plunge in financial-sector earnings. Those estimates fell during the quarter. On April 1, analysts expected a 2% drop in S&P earnings and a 31% decline in the financial sector.
Some stocks will go up, but now is not the time to catch a falling knife.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
7-02-2008 @ 12:53PM
gerald vaughn said...
We have only hit the tip of the iceburg in the down slide of the stock market. Companies like AIG who will probably lose another 20 billion in the comming months. GM who is bleeding money and building the volt car that doesn't even have a power sorce designed yet. The beginning of the large jumbo loans failing and the beginning of the housing markets that have so far escaped the inevitable down turn. The out of control oil, heating oil, natural gas and food prices. How much do you think the largest spending part of the population can keep up with everything that is sucking their wallets dry faster than an electrolux 12 amp vacum cleaner with overdrive installed? Winter is only a few weeks ahead and just the energy cost in places like the northeast to heat and cook this winter will cost an average of $700 more per house than last year. Gas will add $1200-$2000 more this year and food $800-1200 more per house hold. Don't forget those extra partime jobs everyone gets to help supplement their incomes aren't there anymore because every business is down sizing trying to survive. People who rely on tips have had a 60%+ drop in income. I have cut back my spending 70% just because I saw where we are headed. If I must tell you it is into a depression. Auto sales have dropped faster than Amy winehouse out of a rehab clinic. The auto sales people I suspect have lost 40-70% of their income this year. I have two large auto dealers who aren't even in business anymore just since Jan of this year. Another dealership I used in Texas late last year is also folded shop. We have lost in my estimates from what has been reported at least 1 million jobs so far this year and most of them were jobs that paid 75,000 plus per year plus benifits. This is why you will see a drastic increase in jumbo loan failures through the rest of the year. My friend who owns a business is strugling to pay his bills when just 1 year ago he had more money than he new what to do with. I haven't seen a new house built near me in so long or a temp tag on a new car in 5 months, how can there possibly be a second half recovery. You better put your money in a safe place and cut back all extra expeditures or you will be in trouble my friends.
7-02-2008 @ 6:43PM
garyrjas said...
These prognostications are mostly BS. Half of the people you talk to say its going to be uneasy but not as bad as you think and that we are just talking ourselves into a recession by all of the doom and gloom. All this talk about saving your money, etc. is just killing the economy. What are you saving it for? If it really gets bad unless you have millions it won't go very far anyway. Car companies will have to build smaller cars, but when they do they'll sell again. Real estate is going to go up, foreigners are going to start buying and thats going to pressure the market to open up. Oil will stabilize as eventually it will price itself so high there will be a steep decline in demand.
7-02-2008 @ 10:04PM
Maynard said...
GM possibly going into bankrupcy. They need to get on the stick and build a full size vehicle that gets 40mpg. I don't care if it runs on peanut butter. Just build it they will come.