Unemployment figures are down – by some estimates, we will have regained all the 7.9 million jobs lost during the recession by next spring. GDP numbers, too, are up; the economy grew at a sharp 3.6% pace in the third quarter, faster than even most experts had anticipated. So why has the stock market lost over 2% of its value this week? Shouldn’t this good economic news be boosting stocks (and our 401ks)?
In these market conditions, up is down and down is the new up. Since the Fed began pumping money into the economy to fight the recession via a process known as quantitative easing (QE for short), markets have been accustomed to the extra support. But now that the economy seems to be on the mend, it’s likely the Fed will soon begin unwinding QE, and markets are scared of going without the extra boost. So in a bit of a twist, good economic news is now sending stocks down, while disappointing numbers can send the market on a tear.
Is it really so scary?
There’s an ongoing economic debate about the underlying health of the economy. Once QE is gone, will it falter and dive into recession again? Are the good GDP and unemployment numbers inflated due to QE? Are stocks now overvalued?
True, the market has been on a tear since its 2009 lows, but its growth has been typical of post-recession market increases. Company profits, too, have been growing at a healthy clip, up 39% from their recession lows, and most stock valuations do not seem to imply a bubble – yet.
Plus, Janet Yellen, the incoming successor to current Fed chief, Ben Bernanke, is committed to using the Fed’s available tools for boosting employment. That means QE is likely to continue at least through next spring or summer, and that any unwinding will be gradual and measured.
But is it enough?
Still, valid questions remain regarding the market’s reaction, and as the famed investment manager, Bill Gross of PIMCO notes, it really could go either way — but not as abruptly as you might think. He argues that an unwinding will probably be gradual, as would be a market reaction.
So, does that mean you should get out? Sadly, I (like everyone else) don’t have a crystal ball, but indications are that a full-out collapse is unlikely. There’s too much momentum in the underlying economy, a few more safeguards in our economic system now than there were in 2008, robust corporate profits, and a Fed determined to avoid it. That doesn’t mean we won’t experience declines — perhaps even sustained – but simply that barring hysteria or other unforeseen events, any declines will probably be more muted. And if you believe that the economy is healthy enough to withstand the removal of QE, there’s even an argument for continued growth.
Unless you’re an active trader (which we don’t recommend), this is all a moot argument, however. Someone invested for the long-term is unfazed by market gyrations. Just remember: If you’d pulled all your money from the market in 2008, you would have never experiences the dramatic 160%+ gains since. Staying the course on a strategy of index funds with some diversification based in your risk tolerance remains our recommended approach, no matter which way the stock market winds blow.