There's been economic progess nationally; still a long way to go
The S&P 500 reached 1,500 this week. The last time that it was at this level was before the great recession in 2007.
It is in striking distance of its all-time high. In 2007, when the S&P reached this level, it was not the first time that it achieved that level. It first did it in 2000. That means if you owned an S&P 500 indexed fund since 2000. You are just getting close to breaking even. Of course, you would still have to make up for two things. First, there are costs to owning the fund. Even though an index fund usually has lower cost than an actively managed one, it will still reduce your return. Also, how many people panicked during the two bear markets and sold when the market was going down and thus locked in their loses.
Both times the S&P reached this level previously, there was a correction. Time will tell if it will happen this time. Most people that I meet with believe that they are earning 8 percent in the market every year. That just is not true. Many retail investors have left the market because they do not trust Wall Street. There have too many scandals. The market has risen lately on low volume. That means less shares than normal have been sold on a daily basis. High-speed professional trades now account for close to 70 percent of the volume.
The market has bounced back so fast from 2008 for several reasons. First, it probably fell further than is should have. There were major problems, but the market fell in half. Second, companies profit margins are higher because they have less employees. It has gotten more expensive to hire employees because of all of the new laws and uncertainty. This means that companies are expecting more of their remaining employees. The biggest reason the stock market has increased so much is the easy money policies from the Fed. Although these policies have not done much to lower the unemployment rate, they have made it cheaper for companies to borrow at low interest rates.
This easy money policy has also helped the stock market. Returns are so low in bonds, that people have taken on more market risk to try and beat inflation. A July 11, 2012 study by the New York Fed estimated that most of the post 1994 gain is the result of the Fed's action. They believe markets would be 50 percent lower without their help. That would put us back at 2008 levels. What will happen to the market when these easy money policies finally end is anyone's guess.
The next big challenge for the market is going to come in March when we are scheduled to reach the sequester. When the Super Committee in 2011 could not reach a grand compromise, the motivation was that we would have $1.2 trillion dollar in spending cuts and all Bush-era tax cut would expire. That was the fiscal cliff that we just averted. While a deal on tax cuts was reached, sequester was pushed back until March. Last week, the House voted to extend the debt ceiling negotiations for several months. Their requirement was that if both parts of Congress do not pass a budget at that time, none of them get paid until it is done. It is hard to believe, but the Senate has not passed a budget in about four years.
If the sequester takes place, which becomes more likely each day, it is estimated that it will reduce our gross national product from 2.6 percent to 1.9 percent. This slow down will reduce corporate profits and probably the stock market in general. Although we have made some progress, we still have a long way to go before the economy is again strong.
Gary Boatman is a certified financial planner and local businessman who serves as president of the Monessen Chamber of Commerce.
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