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Irwin Kellner
Sept. 7, 2010, 12:01 a.m. EDT · Recommend (3) · Post:
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Economy needs more confidence, less angst
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Banks need to come clean on prop trading
By Irwin Kellner, MarketWatch
PORT WASHINGTON, N.Y. (MarketWatch) -- By rising last week the stock market may be setting itself up for a decline later on.
Last week's gain by the Dow /quotes/comstock/10w!i:dji/delayed (DJIA 10,448, +127.83, +1.24%) and other market measures snapped a three-week losing streak. And while it did not offset declines earlier in August, it marked the best pre-Labor Day week in two decades, according to The Wall Street Journal.
While such a gain was welcomed by the bulls, the bears took note that the last week in August is not indicative of future trends, since it usually is accompanied by light volume, as traders drift away in advance of the holiday and gird themselves for the weeks ahead.
Historically, September has been one of the two worst months of the year for stocks. The other is October.
It appears that fall is the time of year when the bears emerge for their annual romp down Wall Street. As the days grow shorter, so does the bulls' patience.
There are at least two reasons why stocks usually stumble around this time of the year.
One deals with history. Many traders and investors look to the past as a means of divining the future, and when they look at Septembers and Octobers from years gone by, what they see is trouble.
Some of the biggest declines in market history occurred at this time of the year. They include the crashes of 1929, 1966, 1973, 1987, 1989 and 2008, to name a few.
As a consequence, traders become so edgy around Labor Day that almost any event will set off a wave of selling. In today's environment, for example, it might turn out to be disappointment over President Obama's latest stimulus plan.
Another reason deals with earnings. By September, many firms realize that actual results are not as glowing as earlier projections. This is a reality check for many investors who heretofore had been paying more attention to earnings forecasts than to final figures.
Even now, earnings projections have been dialed back. In April, analysts expected profits to grow by 20% next year; that is down to 15%, and even this may be too high, since it is three times what they expect for nominal gross domestic product growth.
Stocks fell last September, even though the economy grew by an annual rate of 5% in 2009's fourth quarter, carrying corporate profits along with it. No one expects this kind of growth this year. Indeed, for all anyone knows, we may be in a double-dip recession, instead.
This alone is bad news for profits. But there are other reasons to be cautious about earnings as well.
For one thing, productivity is falling as companies find that they can't squeeze any more output from their staff. This means that profit margins are taking a hit.
Then there is weak demand, evidenced by the fact that the economy barely grew in this year's second quarter, paced by lackluster consumer spending. This is forcing many firms to cut prices, which further depresses earnings.
That said, all is not entirely bleak. Once October runs its course, history suggests that any declines should be looked at as buying opportunities.
First there is the old saw "buy in November, sell in May and go away."
Then, the third year of a presidential election cycle (in this case 2011) tends to be good for stocks.
Finally, stocks like to climb a wall of worry, and today there is plenty of worry to go around.
Irwin Kellner is MarketWatch's chief economist.
Irwin Kellner, MarketWatch's chief economist since 1998, writes a weekly column on the economy and the financial markets. He has been a leading economist for more than 40 years and previously served as chief economist for North Fork Bank, Chase, Chemical and Manufacturers Hanover. Widely quoted by the media in the U.S. and abroad, Kellner regularly addresses groups of business people and community leaders and appears regularly on Cablevision's News 12 Long Island.
The black box of Wall Street proprietary trading is still in the dark, despite rumblings that big banks are planning to shutter units or keep them at arm's-length, writes David Weidner.
3:56 p.m. Sept. 3, 2010 | Comments: 12
- WHATYOUWANT | 1:32 a.m. Today1:32 a.m. Sept. 7, 2010
"Irwin Kellner: It's bear season on Wall Street http://bit.ly/czxFN6" 2:15 a.m. EDT, Sept. 7, 2010 from MktwKellner
"Irwin Kellner: Economy needs more confidence, less angst http://bit.ly/9qeMDx" 1:04 a.m. EDT, Aug. 31, 2010 from MktwKellner
"Irwin Kellner: Blowing in the wind http://bit.ly/dtlNvl" 11:24 p.m. EDT, Aug. 23, 2010 from MktwKellner
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