What a difference a day makes.
On Thursday, October 29th, the Dow Jones was up over 200 points and analysts were suggesting that investors were relieved by reports showing that the economy had grown 3.5% in the third quarter of 2009. Come Friday, things looked very different.
A big selloff in erased the previous days gains thrashing the market downward nearly 250 points, or 2.51%. This time, analysts were saying that investors were dumping shares at the end of the week, and end of the month. Whatever the reason, the selloff hit all 30 components of the Dow with energy sectors hit the hardest and the financials giving back the big gain they had notched the day before.
Friday's action underscored the fact that no matter which direction the market is headed, the recipe for getting there is volatility. For long-term investors, the crazy action should have no bearing on investment decisions which have years for the current issues to work themselves out. For investors with shorter-term horizons, or for those who just can't keep their eyes off the news, the end of month action was not fun.
While Thursday's report suggested positive growth for the U.S. economy, Friday's batch of economic data made no such pleasantries.
It seems that although personal income is holding relatively steady, personal spending is dropping. That bodes ill for the upcoming holiday season and suggests that consumers are still looking nervously over their shoulder, choosing to save, rather than spend. That can be very bad news for an economy where business has all but stopped spending, and the recovery depends on U.S. consumers opening their wallets, particularly for the all important holiday shopping season.
Other data suggest that inflation may be on the rise. This could be the double-whammy that no one wants to see. Stagflation is when inflation rises while the economy contracts, and it is never pretty to see. Investors are nervous because the Fed's hands are tied right now. Any moves to tighten monetary policy or government guarantees are sure to cause the gains made from last year's bold market interventions, and 2009's giant stimulus spending package to disappear.
The bright spot among all the chaos is that the markets are still up substantially for the year. Investors who didn't panic during the market crash of 2008 and stayed with their long-term diversified investment portfolios have seen a lot of those barbaric losses recouped.
The last two months of 2009 look to be particularly critical. The only guarantee is plenty of action.