Why We Can’t Have a Sustained Economic Recovery
Things are looking up for the economy again. Unfortunately, things are not always as they seem.
The U.S. Commerce Department said that the U.S. economy grew at 2.5% in the third quarter—the fastest pace in a year. Moody’s Investor Services last week raised the corporate ratings of both Ford Motor Company (NYSE/F) and General Motors Company (NYSE/GM), an indication that the car companies are doing better as well. All of a sudden, people are feeling good about the U.S. economy again.
But it was only this summer that analysts were calling for a second U.S. recession. Some economists said we were already in a recession. The numbers being released on the economy beg to differ. Or do they?
Fickle…that’s the word I use to describe today’s modern economists. The stock market starts heading down (as it did this past August) and all of a sudden we are headed for a recession. The stock market gets close to new high (as we are now), and the economists say we’ve turned the corner and are out of the recession.
What’s the truth? How do we make sense of all these numbers to make the right decision for our investment portfolios and for our businesses?
I’ll get right to the point, my dear reader. We cannot have a sustained economic recovery without a recovery in the real estate market. Job growth in the U.S. will not happen unless the construction industry, housing industry and real estate market in general come back. And, from all sides, we can see that the housing market is far from a recovery.
Consider these facts about the real estate market:
The median price of a new U.S. home fell 10% in September 2011 from September 2010, the biggest drop in two years.
The median price of a resale home, which makes up 94% of the real estate market, fell 3.5% in September 2011 from September 2010.
Cash deals account for 30% of all home resale transactions in the U.S.
The Dow Jones U.S. Home Construction Index, an index comprised of the largest U.S. homebuilder stocks and a great leading indicator of the real estate market, is still down 80% from its 2007 high—the worst performance of all Dow Jones sub-indices
Now here’s the scary part about the real estate market: According to Bloomberg, there are 11 million homes in the U.S. where the mortgages are higher than the value of the homes.
Until we have a recovery in the real estate market, which could be years off, we can’t have a bankable economic recovery. That’s the bottom line. And that’s why we simply continue to be in a bear market rally—a period in which the stock market moves higher as the bear completes its Phase II cycle of luring investors back into the stock market before stock prices fall again.
Where the Market Stands; Where it’s Headed:
Last trading day of the month and it looks like October is going to go out with a bang! What a difference a month makes. We started out October close to 10,400 on the Dow Jones Industrial Average. We are closing the month around the 12,000 level. But, despite the market recent run-up, pessimism still reigns with stock advisors, investors, and consumers.
We are in Phase II of a secular bear market. This phase of the bear market will move stock prices higher, as the bear convinces investors that stocks are a safe investment again. Phase II of bear market rallies can last three to four years. This bear market rally has lasted 32 months thus far and shows no signs of abating.
What He Said:
“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi in PROFIT CONFIDENTIAL, October 6, 2008. From October 6, 2008 to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.
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