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Blog : A Perplexing Kick Off to the Fourth Quarter
by John Whitefoot on October 5th, 2007
Wall Street came tearing into the start of the fourth quarter this week with a huge rally Monday, sending the Dow Jones industrial average above 14,000 and well into record territory. Investors were buoyed it seems by the growing belief that the worst of the credit crunch had passed.
But can the financial turmoil that sent the markets reeling 10% this past summer really be over that quickly? As investors, do we suffer from short-term memory loss, or, are we really just an optimistic bunch?
This week at least, it seems as though investors are leaning on the side of optimism. After all, the Dow more than erased its earlier losses on Monday, closing well above a previous record set in July.
Maybe our (short-term) optimism can be laid at the polished unicorn hide loafers of former Fed chairman Alan Greenspan? On Monday Greenspan chimed in saying that the credit crisis could nearly be over.
Sure some investors tore away from the Q4 starting block with a burst of energy, but maybe they took off a little too fast -- or should at least pace themselves. Greenspan also said recently at a conference in Lisbon, "I think the odds of a recession in the U.S. is somewhere between a third and a half."
I’m not sure if those are good odds or not. If I was told a penny stock had a 50/50 chance of soaring to $45, I’d be intrigued. Tell me we can avoid a recession by the same odds, and I’ll probably err on the side of caution. Clearly I’m in the minority.
But what exactly is a recession? Sadly, there is no strict definition. However, one that economists hold dear is "two consecutive quarters in which the gross domestic product (GDP) decreases."
An overall decrease in the value of goods and services indicates that demand has decreased in most markets. This is a bad thing of course because it means companies have laid off people and unemployment is up. The stock market is also in a pretty bad state too when overall value is decreasing. While GDP is not the be-all to defining a recession, it is a good barometer.
Unfortunately, society does not live by economic definition alone. Justin Lahart of the Wall Street Journal wrote recently, "The stock market is often seen as a leading indicator of economic growth. But there seems to be a disconnect here, because the economic outlook sure doesn’t seem bright."
Oddly, it appears that Lahart is at odds philosophically with President Bush. The President commented lately that the U.S. economy is healthy, despite this rough patch. "I say that the fundamentals of our nation's economy are strong. Inflation's down, job markets are steady and strong. The national unemployment rate is 4.6 per cent. Corporate profits appear to be strong, exports are up."
And the President may be correct asserting that things aren’t quite as bad as they seem. After all first quarter GDP was up 0.6% while second quarter GDP increased 3.8%. The general consensus is that in the third quarter the GDP will rise 2.3% and in the fourth quarter it will inch up 1.5%.
Are the markets once again ripe for easy money? While I tend to be an optimist, and really, you have to be if you deal in penny stocks, I can’t help but think about how many investors were blindsided this past summer by the credit crunch.
But then again, investors of every ilk appear to have this past summers credit crunch in the rear view mirrot. So for now, forget about any notion of a recession and enjoy the optimism swirling around Wall Street. While you still can.