Eroding Confidence in Equities

March 3, 2009

Shifting rates of decline in share prices play a role as both cause and effect in the financially-inspired economic crisis.  Equity market behavior provides a barometer of confidence in the policy response to the crisis, expectations about how soon stability might return, and fears that capitalism will never be practiced the same way again. Talk of nationalization has fanned the panic.  More and more economic think tanks foresee nationalization of some, if not all, large U.S. banks.  The fear is that after the banks, it will be the automakers, then healthcare, and various and sundry other sectors after that.

Key dates in the crisis so far were August 7, 2007 (the day before it began), October 9, 2007 (when the DOW recorded its all-time closing high), September 12, 2008 (just before Lehman’s engineered failure), November 4, 2008 (Election Day), and January 20, 2009 (the Obama inaugural).

The movement of equities suggests that political changes in America have failed to inject confidence.  After improving marginally after Obama was elected, the DOW has declined since January 20th at an even faster pace than it did between the Lehman failure and Election Day. On October 9, 2007, the DOW closed at a new high of 14165, 4.9% above its close on August 7th and representing an annualized increase of 31.9% over those two months.  From then until the Lehman failure, the DOW lost 19.4% or 20.7% annualized over 11 months.  It was a bear market but a very manageable one.  Between September 12th and November 4th of last autumn, the DOW fell 15.7%, which was an annualized drop of 69.3%.  Between November 4th and the inaugural on January 20th, the index of 30 blue chip stocks dropped another 17.4%.  That was a period of shared presidency in the public’s perception.  Obama was constantly in the news limelight, Bush hardly at all.  The annualized drop of the DOW in this period was 59.6%, ten percentage points slower than in the previous yardstick interval.  There was a hint of hope, but fear and cynicism remained dominant emotions.  Since the Obama swear-in, the DOW has lost 14.6%, and the annualized rate of decline has re-accelerated to 74.6%, even more rapid than in the aftermath of the Lehman/AIG debacles.

As an effect, stock market losses during the past six weeks signal despair, desperation, and confusion about what policymakers are planning to do and indeed if any strategy, including the passage of time, exists to solve present difficulties.  The president retains very strong approval ratings, so he does not appear to be a singular object of blame behind this negative mood.  In time if the economy and markets fail to improve, goodwill will slip away as well.  Meanwhile, the dissipation of wealth poses an insidious threat to the economy’s ability to turn a corner or even pass an inflection point wherein the downturn’s intensity flattens.

In the nearly half-year since the Lehman failure, stocks have dropped at a 66.9% annualized rate.  Such a rate of fall would cumulate to the 81% decline of Japan’s Nikkei in less than an additional year and a half.  It has taken the Nikkei over 19 years to lose that much ground.  For much of this crisis, optimists have maintained that the United States is fundamentally different from Japan from the standpoint of greater private-sector and policy flexibility and in several other basic respects.  What happened to Japan simply could not happen to the United States.  Or could it?  Time is running out for economic data to confirm this conventional wisdom.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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