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But what about the economy?
The deal initially proposed by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke to rescue Wall Street and get the capital markets working again addressed only half the problem.
Stabilizing the financial markets is necessary, but it isn't sufficient to get a battered economy rolling again. And while our politicians and financial experts are focused so exclusively on the health of the financial markets, the economy continues to deteriorate. Some economists have started to forecast a real recession -- with negative economic growth -- for the third and fourth quarters of 2008.
This is bad news for all of us living in the real economy. Job losses are likely to grow. Consumer spending will likely drop. Home prices will continue to fall. I think most of us will feel more worried about the economy in a month or two than we do today.
But the news isn't nearly as grim for investors. A real recession would quite likely end the current bear market in stocks, just as in 1974, when a recession arrived to put an end to a savage bear market. It was a period, in its combination of economic slowdown and post-bubble financial meltdown, with a striking resemblance to the bear market that started in 2007.
So as perverse as it may seem, I'd say to investors: "Cheer up. The economy is about to go into a recession, and good times are on the way."
The problem they can't fix
Let me start by utterly depressing you by listing the evidence that the economy is going into recession. While we're all mesmerized by the predictions of financial-market Armageddon coming from Paulson and Bernanke, the problems in the real economy have actually gotten worse:- On Sept. 24, the Commerce Department reported that sales of new homes had dropped by a seasonally adjusted 11.5% in August from July's already low levels. Sales of 460,000 for the month were down from the 520,000 new homes sold in July and the 500,000 sold in June. Sales for August 2008 were down 34.5% from sales in August 2007 and reached their lowest monthly total since 1991. The inventory of unsold new homes fell for a 16th straight month but still amounted to a 10.9-month supply at recent rates of sale.
- On the same day, the Labor Department reported that new unemployment claims had risen to a seasonally adjusted 493,000 in the week ending Sept. 20. That was up from 461,000 the week before. The total number of new and continuing claims climbed to 3.5 million, about 1 million more than at the same time in 2007. Recessions typically see new weekly claims rise to 500,000. The economy isn't quite there yet, but it's getting very close.
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- New orders of durable goods -- cars, furniture and other items that are expected to last three years or more -- fell 4.5% in August, the Commerce Department reported, after posting slight gains in July, June and May. Even after the exclusion of orders for aircraft, which fluctuate wildly from month to month, and automobile sales, which everyone knows are in the tank, new orders were down 3% in August.
- On Sept. 25, General Electric (GE, news, msgs) told Wall Street to expect earnings of $1.95 to $2.10 a share in the third quarter of 2008 and not the $2.20 to $2.30 a share it had projected earlier. In addition, the company said it wouldn't raise dividends in 2009. That will mark the first time in 21 years the company hasn't raised its annual dividend.
- On Sept. 26, the Commerce Department (boy, those guys just keep dishing out the bad news lately) announced that the economy had grown at an annual rate of 2.8% in the second quarter of 2008, instead of the 3.3% calculated just a month ago. Corporate profits fell 7.1% from the second quarter of 2007.
Ready to jump off a bridge yet?
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The dollar's comebackWhy is the US dollar climbing when US stocks are tanking? Because Europe's financial system may be in even more danger than that on this side of the Atlantic, Jim Jubak says.
Wait, it gets worse. It looks like we've reached that point in an economic downturn when the negative trends start reinforcing each other.
In New York City, for example, a slowdown in the real-estate industry and a meltdown in the financial industry will result in a huge decline in tax revenue. The city saw hard times coming and put aside a rainy-day fund that will bridge the gap in fiscal 2009. But the city now calculates it will face a $2.3 billion budget gap in fiscal 2010. To prepare, officials will cut about $1.5 billion in expenses over the next two years.
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