Why All the Investor Doom and Gloom?

A grim twist in the market's road to health has heightened investors' sense of doom and gloom. We've seen this before; take a look at what happened then.

It's been a pretty miserable period to be in the stock market. The past two months represent the worst May-June performance for the S&P 500 Index ($INX) in 48 years.

Since the Dubai debt crisis emerged in November, investors have slowly turned their attention from the sugar rush that was the economy's initial stimulus-fueled return to growth in July 2009 to what lies ahead. And they don't like what they see.

Double-dip recession ahead?

It's no wonder doom and gloom prevail. Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=16049325-a1ca-488c-a19e-53f77ce880e1,39e41062-5193-4557-ae27-e2914f31d5f1,fea0a1ab-afa7-43f7-b139-64acf766e034,9e768523-4a28-4ac2-a77c-64961235c57e,813d7bdc-2c90-43af-b44e-e6ec576b1696,4931ce52-07ae-4022-b4cb-d113724e5147,076f857c-3967-45af-9115-0155230cee65,ca47912f-3a77-4248-ba2b-1bf33c385dcb,9cc051b2-70e1-4d2e-ab56-87afde302587,1e017457-6e6b-4d4f-91c6-45e14c1e7b13,698e4333-8a09-4156-b2e7-2a4dbb057e30,4251f47b-21f7-4b53-9aee-8ede8d02b9c3", "player.fr": "iv2_en-us_money_article_16x9-Investing-Extra"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=16049325-a1ca-488c-a19e-53f77ce880e1,39e41062-5193-4557-ae27-e2914f31d5f1,fea0a1ab-afa7-43f7-b139-64acf766e034,9e768523-4a28-4ac2-a77c-64961235c57e,813d7bdc-2c90-43af-b44e-e6ec576b1696,4931ce52-07ae-4022-b4cb-d113724e5147,076f857c-3967-45af-9115-0155230cee65,ca47912f-3a77-4248-ba2b-1bf33c385dcb,9cc051b2-70e1-4d2e-ab56-87afde302587,1e017457-6e6b-4d4f-91c6-45e14c1e7b13,698e4333-8a09-4156-b2e7-2a4dbb057e30,4251f47b-21f7-4b53-9aee-8ede8d02b9c3;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');So was that the recovery? Has the much-discussed double-dip downturn -- or even a brand-new recession -- already begun? The short answer: probably not.

But recent economic data have revealed a "soft patch" of activity that stocks have apparently been pricing in this whole time. The growth in manufacturing orders has slowed. Home sales have plunged. Consumer confidence is down. And now the economy is losing jobs again. Even in China, manufacturing is slowing, at least by some measures.

Given the huge amount of stimulus spending and with interest rates at record lows, this is alarming, disturbing and depressing all at the same time. What happens when stimulus spending dries up and interest rates go up, as both inevitably will?

Growth is still likely to slow as the economy settles into a long-term growth rate that might not be all that impressive. Jobs will be slow to come back, and the go-go economic days of the housing bubble are gone for good. This recovery hasn't felt like one to a lot of people, so watching it slow down can easily seem like something worse.Better than it looks Indeed, the catalyst for much of today's unease is the economy's transition from the high rate of growth seen during the initial recovery (as the economy returned to previous levels of output) to a more subdued growth rate seen during a more normal economic period. At these times, people naturally begin to fear the specter of the next recession.

Yes, it's uncomfortable, with the economic growing pains made worse as we recall the excesses of the last debt-fueled business cycle. But this shall pass. And if historical patterns hold, the current bout of malaise presents a fantastic opportunity for investors to buy shares at a discount. If you missed out on the rally and are still holding a large percentage of "safety assets" such as gold and bonds, now's the time to start moving back into stocks.

But first, let's give the economy and policymakers some credit. Thanks to then-President George W. Bush's $700 billion financial rescue and President Barack Obama's $787 billion stimulus package, the economy has been brought back from the brink. The Federal Reserve gets credit, too, for lowering the interest rates it controls and for engaging in "quantitative easing," printing extra cash to help push down a broader collection of short-term and long-term rates.

The government backstopped the damaged financial system and created demand for goods and services when consumers and business leaders scurried into their economic bomb shelters. Mortgage rates dropped to historic lows. Debt-service costs fell, helping to rebuild household balance sheets. Unemployment benefits were expanded and extended. All of this was a direct application of the economic concepts built on the lessons from the Great Depression.

As a result, the financial system has stabilized. Stock prices, despite their recent troubles, are up more than 50% from their lows. Home prices are up more than 4.3% from their lows. Consumer spending has increased. The economy, after undoing the damage caused by the contraction from late 2008 to mid-2009, is now expanding. And since December, nearly 2 million Americans have found jobs, according to the latest household data from the Bureau of Labor Statistics.

Even the Europeans and the Chinese deserve some credit, with Beijing's timely $586 billion stimulus package in 2008 and the recent flurry of bailout activity in the eurozone. Central bankers around the world have been extremely accommodating.

This is a far cry from the policy blunders and lack of international cooperation that deepened the Great Depression. The sky isn't falling. Really.

Continued: A look around the cornerMore from MSN Money

Will falling prices sink the economy?

Wall Street versus your 401k

For investors, the future is on hold

Has America lost its edge?

Hey, Wall Street, investors need a break

 1 | 2 | next >

Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=6.372093; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=43;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board MSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersDecision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingStocks to WatchCitigroupWells FargoBank of AmericaPatriot CoalUS AirwaysBaiduAppleAESRecent Articles by Anthony MirhaydariWill falling prices sink the economy? 06/30/2010Wall Street versus your 401k 06/23/2010Has America lost its edge? 06/17/2010Fund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8');msft.msn._ic.cid='gc8fn2t8mbvjm0c8rapgbjixhtr8medc';msft.msn._ic.pst=false;msft.msn._ic.pgn=1; Join the discussion!Add a commentShow commentsSort by:Newest firstOldest first_uc2f12('iucGo');1 - 3 of 3PreviousNextbgDog #1Wednesday, July 07, 2010 9:35:31 PM

Tough job trying to predict a market that has been manipulated by crooks and shills (goldman,snakeoil salesmen,lapdogs,moodys,politicians,madoff's,CNBC etc.) but I agree this market is trying to backfill. Hopefully, SEC and FINRA will start doing thier jobs and we can make back some of the money the crooks have stolen. Good article but tough to bet on 1 day.

ReplyReport Abusesr0343_67adljdogj #2Wednesday, July 07, 2010 9:51:29 PM

At the end of the Great Depression and World War II, the world had large oil reserves with which to fuel economic expansion. That is not the case today. There are limits to growth and our economic system is completely unprepared to deal with this. I think we are witnessing the end of economic growth.

ReplyReport AbuseSoth Side #3Wednesday, July 07, 2010 11:27:08 PMBuy Yuan!ReplyReport Abuse1 - 3 of 3PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/Extra/wait-was-that-the-recovery.aspx?','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*

But recent economic data have revealed a "soft patch" of activity that stocks have apparently been pricing in this whole time. The growth in manufacturing orders has slowed. Home sales have plunged. Consumer confidence is down. And now the economy is losing jobs again. Even in China, manufacturing is slowing, at least by some measures.

Given the huge amount of stimulus spending and with interest rates at record lows, this is alarming, disturbing and depressing all at the same time. What happens when stimulus spending dries up and interest rates go up, as both inevitably will?

Growth is still likely to slow as the economy settles into a long-term growth rate that might not be all that impressive. Jobs will be slow to come back, and the go-go economic days of the housing bubble are gone for good. This recovery hasn't felt like one to a lot of people, so watching it slow down can easily seem like something worse.Better than it looks Indeed, the catalyst for much of today's unease is the economy's transition from the high rate of growth seen during the initial recovery (as the economy returned to previous levels of output) to a more subdued growth rate seen during a more normal economic period. At these times, people naturally begin to fear the specter of the next recession.

Yes, it's uncomfortable, with the economic growing pains made worse as we recall the excesses of the last debt-fueled business cycle. But this shall pass. And if historical patterns hold, the current bout of malaise presents a fantastic opportunity for investors to buy shares at a discount. If you missed out on the rally and are still holding a large percentage of "safety assets" such as gold and bonds, now's the time to start moving back into stocks.

But first, let's give the economy and policymakers some credit. Thanks to then-President George W. Bush's $700 billion financial rescue and President Barack Obama's $787 billion stimulus package, the economy has been brought back from the brink. The Federal Reserve gets credit, too, for lowering the interest rates it controls and for engaging in "quantitative easing," printing extra cash to help push down a broader collection of short-term and long-term rates.

The government backstopped the damaged financial system and created demand for goods and services when consumers and business leaders scurried into their economic bomb shelters. Mortgage rates dropped to historic lows. Debt-service costs fell, helping to rebuild household balance sheets. Unemployment benefits were expanded and extended. All of this was a direct application of the economic concepts built on the lessons from the Great Depression.

As a result, the financial system has stabilized. Stock prices, despite their recent troubles, are up more than 50% from their lows. Home prices are up more than 4.3% from their lows. Consumer spending has increased. The economy, after undoing the damage caused by the contraction from late 2008 to mid-2009, is now expanding. And since December, nearly 2 million Americans have found jobs, according to the latest household data from the Bureau of Labor Statistics.

Even the Europeans and the Chinese deserve some credit, with Beijing's timely $586 billion stimulus package in 2008 and the recent flurry of bailout activity in the eurozone. Central bankers around the world have been extremely accommodating.

This is a far cry from the policy blunders and lack of international cooperation that deepened the Great Depression. The sky isn't falling. Really.

Continued: A look around the cornerMore from MSN Money

 1 | 2 | next >

Tough job trying to predict a market that has been manipulated by crooks and shills (goldman,snakeoil salesmen,lapdogs,moodys,politicians,madoff's,CNBC etc.) but I agree this market is trying to backfill. Hopefully, SEC and FINRA will start doing thier jobs and we can make back some of the money the crooks have stolen. Good article but tough to bet on 1 day.

At the end of the Great Depression and World War II, the world had large oil reserves with which to fuel economic expansion. That is not the case today. There are limits to growth and our economic system is completely unprepared to deal with this. I think we are witnessing the end of economic growth.

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