The following is from the February issue of the Forbes Growth Investor.
Despite staging a bit of a rally toward the end of 2008, stocks plunged again to kick off the start of a new year. According to data from Ibbotson Associates, last month’s selloff in large-cap stocks was the worst ever for a January. An old Wall Street adage says,“As goes January, so goes the year.” This is not an encouraging sign for investors who are long. Those who believe in adages and indicators should at least take some solace from the Super Bowl, since it pitted two teams from the old NFL against each other; a good omen for stocks.
Unfortunately, the news continues to be bad on the economic front. Most economists were expecting a large retreat in fourth quarter GDP. Yet the Advance estimate, a decline of 3.8%, was better than the consensus expectation. Investors seemed relieved at first. However, they quickly changed their minds once they realized that increased government spending, a $6.2 billion build in inventories, and an $80 billion decline in imports largely explained why the GDP report was not worse than it was. This was the first build in private inventories in at least two years. Companies were producing more than they could sell. During the current (first) quarter, however, businesses have been laying off workers at an accelerating rate so production should slow. As for international trade, it too is slowing appreciably. And it wasn’t just imports that declined. Exports were off $83 billion.
There is a real lack of demand on the part of consumers. Other than necessities, people are not buying anything. This is not simply due to a lack of available credit. There has been a real change in the mindset of American consumers. We are rapidly transforming from a nation of spenders into a nation of savers at precisely the wrong moment. No one wants to spend money—even those who are relatively well off and gainfully employed—when coworkers and neighbors are losing their jobs. Large numbers of clothing stores, electronics stores, and automobile dealerships are simply shutting down for good.
Lack of demand is also plaguing the housing market. New home sales have fallen off a cliff. Just a few years ago, home builders were selling 1.2 million new houses a year at an average price of almost $300,000 each. These days they are selling only one-fourth as many houses at an average price that is almost 20% less. At the current rate of sales, it will take 16 months to clear the inventory of new houses. It is inevitable that at least a few of the publicly traded home builders will not survive this crisis as independent entities.
Things are a little rosier for existing homes. Sales climbed 6.5% in December thanks largely to falling prices and growing interest in foreclosed properties. Inventory fell almost 12% in just one month. It is possible that we are finally approaching a bottom in existing home prices. I’m still calling for that to happen by late spring. While stable housing prices are key to restoring confidence in the economy, the days of thinking about residential housing as an asset class are probably gone for a long time. It is good to get rid of the speculation in this sector.
