Boom and Crash: The Stock Market

The ups and downs of the stock market have been both euphoric and exasperating in the last several weeks. Constant instability, historic swings - both positive and negative - have left many wondering what to do next. The Dow Jones Industrial Average has fallen approximately 4,800 points from its all-time high of 14,164.53 (October 9, 2007). It shed points so furiously last week that some entertained the possibility of a zeroing of the world's largest stock index.

People who had invested for retirement, expecting modest returns to at least outpace inflation, were devastated. In 366 days a well-diversified - and thus typically stable - portfolio would have lost at least 30-40 percent of its value. A poorly managed fund could expect even lower returns. In the worst-case scenario, an investor would have been wiped out completely. On Friday October 10, 2008, the major U.S. stock indexes - DJIA, NASDAQ, S&P 500 - finished so low they wiped out several years of growth. Last week was one of the worst in history, no single week has ever seen the loss of so many points (it should be noted that at no time in history have U.S. markets had so many points to lose).

The skies were darkening and the end seemed near. The numbers were simply mind-boggling as every day a new nominal record was set for points lost. The free-fall seemed to have no end in sight when the markets reopened Monday morning. Then something surprising happened: share prices grew. Many investors, when given a weekend to assess the situation, decided that there was no better time to buy than when the market was at a six-year low. Many long-standing, profitable, American companies were trading for pennies on the dollar.

Monday saw the largest influx of capital into the stock markets in history. The DJIA, NASDAQ and S&P 500 soared as each rose over 11 percent (which was in the top-five of each index's all-time best one day rise). It was the largest percentage-rise in the overall market since the 1930s; with prices so low the only way to go was up. As investors bought-in more and more, the situation looked increasingly rosy. Some analysts now believe that the market reached its bottom last Friday and that the future will be marked with steady gains.

These are the same analysts who were beside themselves when the market floundered and the government's bailout action seemed lost in oblivion.

It should be noted that while the Dow Jones and other stock indexes are decent indicators of an economy's health, they are not now nor have they ever been the driving forces in an economic recovery or downfall. The "Great Depression" officially began when Wall Street stock exchanges collapsed, but the depression began for most Americans well before October 29, 1929 (Black Tuesday). The depression for most Americans also continued well after stocks began to rebound in the mid-1930s. Prosperity did not return to the U.S. until 1945, and it came at the cost of the devastation of much of the rest of the world during World War II.

Monday's market gains are a wonderful sign to those who are invested in the stock markets of the world, but most people are not heavily involved in shares and trading. Most Americans rely on their paycheck and bank accounts, putting little effort into their 401k or other diversified retirement plans. Most Americans had hoped that their home would be a store of value, but with the collapse of the housing market they have seen their equity wiped out. The modest gains of the stock market cannot be misconstrued as being representative of the U.S. as a whole.

The wealth-producing capabilities of the U.S. are still being bought out by foreign interests, and we may never see the recovery of those corporations and their profits. Foreclosures are still increasing, driving some people to the absolute edge of rationality and reason. Market investors went to bed happy Monday night, but Addie Polk still sat in the hospital after suffering a self-inflicted gunshot wound last week when sheriff's deputies tried to evict her from her recently foreclosed home (Fannie Mae, one of the drivers of this economic collapse has forgiven her debt after a media blitz).

We witnessed a historic rally on Monday, but the Dow Jones lost 11 percent in two days just a week ago, thus Monday's gains remain tenable at best. Our economy is stagnant, our banks still refuse to lend (in spite of a $300 billion infusion from the Federal Reserve) and our job market is drying up. Stocks soared on Monday, but the U.S. did not follow their lead. The U.S. wants to follow their lead, but without leadership and innovation from top to bottom, the U.S. simply cannot.