Soft Landing Or Belly-Flop?
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Somebody call a doctor quick; the markets are in desperate need of a house call. The driving force behind the across-the-board weakness in tech stocks continue to be those darn earnings warnings. And folks, don't let anyone fool you with kid gloves - the snowballing preannouncements we're seeing this quarter are the worst we've seen in quite some time. The subsequent punishment that's being dished out by jittery investors has been swift and oftentimes a gross overreaction. That raises real concerns as to why Sheriff Greenspan persists with a tightening bias when the so-called 'soft landing' is quickly shaping up to be a painful belly-flop.
Let me illustrate a simplistic example. Just last Christmas, I was strolling through a shopping mall doing some last minute holiday gift buying. In a fascinating display of the irrational exuberance that was then running rampant in sexy high-tech stocks, I'd hear snippets of drifting conversations from strolling shoppers discussing their latest hot investment tips like some offline financial stock-picker's bazaar. One teenage girl boasted to a friend that her Dad had bought XYZ stock only last week, and since then, it had been off to the races. I'm not one to eavesdrop, but it seemed that virtually everyone with a piggybank was in the frothy market back then looking to make a quick buck. And, it stands to reason that most of those eager beavers were blindsided during this latest Nasdaq tumble.
A friend of mine yesterday began discussing his struggling portfolio; and during the course of our conversation, he offered up a story that reminded me of my aforementioned holiday example, but illustrating just the opposite sentiment. He drove to the mall the other day to buy two shirts and two ties. As he finished up shopping, he briefly thought of his portfolio's current state of affairs, and in that very moment, opted to buy just one shirt and one tie. This, coming from a prominent retired attorney whose extensive wealth is hardly hog-tied to the slumping market. But beneath the surface of this seemingly benign example may lie a microcosm of the wealth effect.
The wealth effect is based on the idea that recent drastic declines in stock portfolios will diminish the warm and fuzzy feeling of wealth and security that the average consumer has, which might lead them to put off buying that new car, repainting the house, or postponing that getaway to Oahu. The theory predicts that that could lead to a ripple effect in the flow of goods and services and a contraction in the economy at large, where more people will be out of jobs, incomes decline, and you're on a collision course with a recession. Many pundits scoffed at the concept years ago, saying that while stock prices are important on Wall Street, they mean very little on Main Street. That may well have been the case when stocks corrected in 1987, but today, more people are investing in stocks than ever before in history.
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