At the annual meeting for the International Monetary Fund another famed economist is speaking out. This time it is Nobel-prize winner Joseph Stiglitz, who warned that the market has demonstrated what he considers “irrational exuberance” in an interview with Bloomberg TV.
Nobel Prize-winning economist Joseph Stiglitz said unemployment is going to keep rising and should be the main focus for policy makers, and that gains in the stock market indicate investors have been “irrationally exuberant” about a recovery.
“There’s a lot of risk going ahead of some big bumps,” he said today in a Bloomberg Television interview from Istanbul, citing housing, commercial real estate and consumers’ inability to pay off credit cards because of job losses. “There’s a very big risk that markets have been irrationally exuberant.”
The U.S. has lost 7.2 million jobs since the recession began in December 2007, and the unemployment rate reached a 26- year high in September, a Labor Department report last week showed. Joblessness is likely to reach 10 percent by the end of the year, according to economists surveyed by Bloomberg News last month.
It’s “pretty clear that the situation will continue to get worse,” Stiglitz said today, citing elements of the jobs report such as the number of people who can’t find a full-time job and the pace at which Americans are dropping out of the labor force.
‘Well Short’
Economic growth this year and next will “fall well short of what we need to stop unemployment from growing,” he said. The likelihood that the U.S. economy will be “out of the woods” before most of the measures in the Obama administration’s stimulus package expire in 2011 is “very small,” he also said. — Bloomberg.com 10/5/2009
This is yet another of the world’s leading economists to warn that the market is still quite risky. In a short time, U.S. equities have gone from buying deeply oversold to now strenuously overbought. The market has bounced between these two extremes leaving itself open to the possibility of a correction. We think it is clear that the market will want to see firm evidence of growth in the upcoming earnings season. If that does not materialize, the irrational exuberance could come crashing down and bring the market down with it.
On this blog, we have discussed many of these same issues nagging the economy, especially unemployment and how it will effect corporate America going forward. We know that Americans are saving more, even those that have been fortunate enough to keep their jobs. Savings rates are at a 24-year high and continuing to climb. Furthermore, 33% of consumers surveyed say they will continue to constrain spending which only 8% claim they will spend more in the next year. We would not be surprised to see consumer spending start to head back down to more historically normal levels as a percentage of GDP. That will put pressure on consumer discretionary and retail industries, but the ramifications will manifest in the economy as a whole. This is not necessarily a bad thing for the economy, as it was and still is overloaded with debt. However, we fear that the deleveraging could be trouble from the market’s point of view.
For investors with a long term outlook, we continue to view a conservative allocation is appropriate. We are not advising selling out of equities, but rather reducing risk and making sure to have an exit strategy. Even if the world’s leading economists do in fact turn out to be wrong, we see a lot of merit in their argument and disciplined investing requires taking profits now.
