Over the last three months, we have seen a significant stock market rally. The Dow Jones Industrial Average is up 30% after the best run since 1982. The Standard and Poor’s 500, a benchmark of a selection of 500 companies, is up 39% and the NASDAQ, the over-the-counter market, is up 45%. It looks like the start of an economic recovery, but is it? The stock market is a leading indicator of the state of the economy. In other words, it predicts what the economy will look like in three to nine months ahead.
The Stock Market and Jobs
On Wednesday, the stock market stalled. We will have to see if that stall means that this was a “bear market rally” or a true indication of economic recovery. A bear market rally is a stock market run up that does not last. Many economists think that the last three months do indicate a bear market rally. Others think that we’re on our way to economic recovery. Unfortunately, none of us have a crystal ball.
Job losses slowed during May, though the unemployment rate jumped to 9.4%. Unemployment is a lagging indicator of economic activity so it may continue to rise even after the recession is technically over.
The Housing Market, Mortgages, and Home Equity Loans
Even though there is a modest increase in home sales, home values are declining. This is good if you want to buy a home. There is, however, a considerable inventory of houses on the market to be sold. Sellers are not getting the money they need out of the homes they need to sell.[/p}
Fear of inflation is suddenly news in the economy. Mortgage rates have gone up. The 30-year fixed mortgage rate has gone up to 5.56%. If you want to use a home equity line of credit to fund your small business, you will pay about 5.8% for a $30,000 - $50,000 line of credit. However, if you want to use a home equity loan, a $30,000 loan is 8.8%. There are important differences in a home equity loan and a home equity line of credit.
Credit Cards
Do you think you have a fixed rate on that credit card you use for financing your small business? Think again. A credit card company only has to give you 15 days notice to change your interest rate. With rates likely going up, that means your fixed interest rate may be a thing of the past. It may be fixed – at a higher interest rate.
The Stock Market, Interest Rates, and Retirement Accounts
The stock market and interest rates usually have an inverse relationship. In other words, if interest rates are going up, the stock market is usually going down. If you have a 401k that you have been watching recover, this is not good news. Some of you may have small businesses with retirement plans set up such as SEP or SIMPLE plans. Spiking interest rates and a dropping stock market would not be good for them.
Economic Recovery or Not?
The signs of an economic recovery are decidedly mixed. Not only is there a fear of rising interest rates, but oil prices are rising. The price of a barrel of crude oil is around $71, raising the price of gasoline at the pump to around $2.75. The U.S. fiscal year deficit is about $1 trillion.
The Federal Reserve released its “beige book” numbers today showing that the economy stayed weak or got weaker in all 12 Federal Reserve districts between mid-April and May, although there were signs the pace of the recession was slowing.
Stay tuned for more updates as events unfold!
