Dow at Record Highs, but U.S. Economy Continues to Worsen
The Dow Jones Industrial Average is firing on all cylinders, trading at a record high. The S&P 500 is also close to its all-time record. Technology and small-cap stocks are blazing along. The amount of new stock market wealth created in the first week of March and in 2013 has been great. Add in the better-than-expected jobs numbers and a decline in the unemployment rate to 7.7%, and you would think that the U.S. economy is back, loaded and ready to go. But we may be closer to a financial crisis than most think.
Here’s the problem: the creation of stock market wealth is heavily weighted with the institutional money and the top one to five percent of the wealthiest Americans. (I use the wider range of the top earners, since you have to be doing fairly well to be in this group.)
There’s an old saying—“Money makes money.” But let me put it another way: making money on $1.0 million is a lot easier than making money on $1,000. Earn two percent on $1.0 million, and you’d have an extra $20,000. Make two percent on $1,000, and you only have $20.00, just enough for a dinner for two at McDonald’s Corporation (NYSE/MCD). All I’m saying is don’t be fooled by the new headlines talking about how well America is doing, as a financial crisis is still possible.
The housing market is booming, but we all know that the rally in prices is partially due to rich investors and institutions buying cheap properties from those who had to sell or be foreclosed on due to a lack of funds to pay the banks. It has basically been the rich making money on the backs of the less fortunate; this has largely been the case during this recovery, and it supports my idea of an impending financial crisis.
I’m not convinced that things are better, so a financial crisis is a reality.
The unemployment rate has fallen. For some, that means it’s time to cheer, but the reality is that there are still some 22 million Americans who are unemployed or have simply given up looking for work. Doesn’t this indicate a possible financial crisis down the road?
Ask the shoppers going to the food banks and dollar stores and the renters who are fighting to pay the rent if America has strengthened based on the wealth creation in the stock markets. I can tell you that the poor and lower-middle class don’t care about how the stock market is faring. This group is just trying to provide the necessities of life and avoid a financial crisis.
The gap will continue to be significant, as the rich have a much larger base of wealth to work from and can accelerate the growth of their net worth much quicker. Given this, I would buy luxury stocks, such as those in the high-end retail sector, as the rich will always have money, regardless of a financial crisis.
So despite the Dow continuing to trade at record levels and the labor market improving, we are nowhere near a recovery, as the media is claiming. In fact, we may be closer to a financial crisis. In other words, the housing recovery is suspect, so avoid housing at the current levels; the country may be under the threat of another recession and financial crisis.