The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Deja Vu….?.

06/03/2010

The scientific term for the stock market during May was . . . lousy. The S&P was down 8.2%, the worst month of May since 1940, when it dropped over 20%. Of course, it was reminiscent of September in 2008, following the collapse of Lehman, there are differences. The U.S. economy is now rebounding nicely. Take a look at this chart on S&P profits:
It shows the most dramatic fall in profits, followed by the most dramatic rise in profits. While some of this is certainly the result of the Stimulus bill, it nonetheless shows real strength in the U.S. economy.

In September of 2008, the world feared a collapse of the U.S. banking system. Today, the world fears a collapse of the European banking system. Make no mistake, this would certainly have a huge impact on us but would not kill us. I don’t foresee the dark days of 2008 coming back to haunt us.

Plus, I suspect investor sentiment is heavily influenced by two other events. First, many investors were terrified by the “flash crash” on May 6th ,when the Dow briefly dropped 9.2% for a few minutes before recovering most of that loss. On May 28th, there was an even worse “flash crash”. Of course, that was in 1962. Since that time, the market continued to improve nicely. Fear is paralyzing. Hint: Think Long Term!

Second, I think the emotional impact of the BP oil spill should not be quickly dismissed, as it is creating a general malaise over the country. The heavy drumbeat of bad news is taking a toll on us. Remember: Think Long Term!

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