| Crowd psychology is interesting, especially when it comes to investors, who generally move in the opposite direction from the one in which they're being led. When an action is taken to try and change market behavior, it generally accelerates the movement in the opposite direction. Over the decades, if the stock market were overheating, the powers-that-be would raise the margin requirements, thereby increasing the amount of cash investors had to put up when borrowing money with which to buy stock, thereby dampening demand. However, more often than not the public perceived the margin restriction as a signal that things were even better than they had thought and they rushed to buy more stock.
This also happened in the reverse. If things were slow and margin requirements were reduced in order to stimulate buying, it in fact produced more selling. The American public isn't so easily manipulated.
Now we are facing diametrically opposing views of the stock market. Stocks continue to rise with no top in sight, while many of those ”in the know" feel the market is due for a major correction and will be heading down, sooner rather than later.
Real estate, on the other hand, is in the doldrums, to say the least. The combination of low prices and low interest rates, the daily double that, under ordinary circumstances, would attract buyers in droves, has failed to do so. Even the enticement of an (up to) $8,000 tax credit for first time buyers has failed to generate any excitement about the real estate market.
Let's take a look at the two, beginning with the stock market, which raises several causes for concern:
1. Price earnings multiples. Stocks appear to be fully priced, if not overpriced, when viewed in this perspective. Many companies' current earnings reflect cost cutting rather than sales growth. In most cases sales have stopped growing, which doesn't bode well for future earnings. A company can sustain earnings through cost cutting measures for only so long until it's forced to close down its operations.
2. Commodities. Many companies that produce or process commodities - oil, cement and gold, for example -- are experiencing higher stock prices due to the weakness of the dollar. Once the Federal Reserve starts raising interest rates again, the dollar should firm up and these companies might well lose value. A stronger dollar also could affect multi-national companies, which currently benefit from a favorable exchange rate for their foreign operations.
3. Consumers. We have a consumer-based economy. Retailers have slashed their prices, but consumers haven't returned in significant numbers. Even when they begin to shop again, Americans will be much more cost conscious. Retailers will have a hard time raising their prices, making it difficult if not impossible for them to recover in the foreseeable future.
Continued... |