Updated at 10:45 AM, August 4, 2011
Remember February 1978? Jimmy Carter was president, Van Halen’s
eponymous debut album was released, and early that month, a powerful
blizzard swept across the northeastern United States, dumping a record
27 inches of snow on Boston and causing more than $500 million in damage
(or some $1.8 billion in present value).
That same month was the last time that the Dow Jones Industrial
Average posted nine straight losing sessions—a streak that Wall Street
narrowly missed repeating on Wednesday. The Dow Jones index rallied late
in the day to close up 29.82 points, or 0.25 percent, at 11,896.44. And
one day after falling into the red for the year, the Standard &
Poor’s 500-stock index broke its own seven-session losing streak. But
the markets promptly resumed their slide Thursday morning, plunging more
than 1.5 percent out of the gate. The S&P 500 is on pace for its
biggest weekly drop in more than a year.
Thursday morning’s losses only add to the damage left by a
blizzard of bad economic data that has troubled investors in recent
weeks—a storm of GDP numbers, manufacturing data, and consumer
confidence readings that wiped away more than $1 trillion in market
value worldwide in less than two weeks, according to Bloomberg News.
The S&P 500 now stands some 8 percent below its April 29 high
for the year. And skittish investors on Wednesday again drove the price
of gold to a new high, the fifth in eight sessions. While stocks have
skidded, gold has jumped more than 3 percent since July 25.
The slide might not have been as bad if lawmakers had cut short
the debt-ceiling soap opera, now on hiatus until Congress returns next
month, or if they had struck a bargain that addressed entitlement reform
and tax reform. “But as it was, the deal was late and it was bad,” says
Dr. David Kelly, chief market strategist for J.P. Morgan Funds. And
investors who were hoping for a relief rally once a debt-ceiling deal
was done have instead been greeted by fresh fears about a deepening debt
crisis in Europe and another recession at home.
At least Washington and Wall Street managed to dispel the old saw
that “gridlock is good” for the markets—a saying that isn’t backed up
by historical data anyway, according to Standard & Poor’s Chief
Investment Strategist Sam Stovall. Since 1900, Stovall wrote in a
research note Wednesday, the average gain of the S&P 500 index in
years during which Congress was split was less than half the gains made
when the president and Congress are all from the same party.
The good news is that the stock market is notoriously poor at
predicting recessions. It may be true that, as Stovall notes, every
recession since 1948 has been preceded by a market decline of 14 percent
or more. But the market often gets jittery even if recession isn’t on
the horizon. Nobel Prize winning economist Paul Samuelson joked decades
ago that “Wall Street indexes predicted nine out of the last five
recessions,” and the numbers now may even be worse. Since World War II,
Stovall says, there have been 83 pullbacks of 5 percent or more, but only 12 recessions.
The bad news is, of course, that investors still have plenty of
reasons to speculate about economic contraction and the need for a third
round of quantitative easing by the Federal Reserve.
The Commerce Department reported Tuesday that consumer spending dropped
in June for the first time since September 2009. The day before, the
Institute of Supply Management said that manufacturing activity in July
fell to its lowest level in two years. And on Friday, the government
announced that GDP growth in the first half of the year was the slowest since the end of the recession in June 2009.
“Everyone realizes the economy is now on life support again,”
says Stovall. “The soft patch has become even softer, and now the
question is, will it turn into quicksand?”
As unnerved investors try to figure out the answer, they’ll be focusing next on the jobs data due out Friday morning.
More on the markets from The Fiscal Times:
10 Reasons Why There Won’t Be a Double-Dip Recession
Italy, Spain Debt Woes Rattle European Markets
Stocks Now Down for the Year