It’s not time to push the panic button – this isn’t 2008
Historically, one maxim was that the stock market condition was a six month leading indicator of the economy. But that generally accepted truth became a walk down memory lane as the investor class morphed into the trading class over the past generation. In a world where the average stock is held about 1.5 minutes, the stock market is now merely a leading indicator of itself, and mostly disconnected from the real economy.
The current disconnect between these historic economic powerhouses of American capitalism, the Main Street economy and the fruits of Wall Street, are now indisputable. During the first quarter of both 2014 and 2015, while the U.S. (GDP) went negative, the iconic Dow Jones reached record highs. Since 2008, fealty to short-term earnings, increased digital trading instead of investing, and the Fed’s quantitative easing regime all combined to create record equities valuations, which we now see as a bubble. Meanwhile, Main Street was never allowed to play in the same backyard.
Nevertheless, before the recent equities crash results in PTSD from the 2008 Financial Crisis, here are five reasons why our current stock market correction is not a financial crisis – yet.
- Liquidity is okay. The 2008 crisis was primarily caused by the liquidity pipeline freezing up in the shadow banking system where mortgage-backed securities, some leveraged 70:1 instead of 1:1, were used as collateral. This correction is about irrational exuberance, not liquidity.
- Banks are clean. In 2008, asset quality of major banks got out of control. They’ve since run a gauntlet of stress tests that has significantly improved U.S. bank capitalization.
- Balance sheets are strong. American companies that survived 2008, large and small, are operating very lean organizationally and clean financially. Payrolls are as clean as a hound’s tooth, and remaining debt, likely long-term, is being serviced.
- Oil is down. This isn’t good for the oil patch, but any time oil goes below $50 a barrel, that’s good for consumers. Low oil begets low gas prices and that’s like giving consumers a raise every week.
- Interest rates remain low. People who have jobs and want a new car or house, or businesses that want to grow, can do so without prohibitive debt service, which is good for the economy.
So, what should you do?
- Call on every one of your business customers. Every one. Do it now!
- Remind them that, regardless of what’s ahead, you’re their partner.
- Think of ways to help them prepare for possible headwinds and be ready to offer those ideas at the right time.
It’s not time to press the panic button. But the closer the Wall Street correction gets to 20% or more – a technical bear market -- the Main Street economy will likely be impacted negatively.
Write this on a rock … While Wall Street is losing its head – again, Main Street continues to be America’s economic rock.
Jim Blasingame is author of the award-winning book, The Age of the Customer: Prepare for the Moment of Relevance.
