Nervous Consumers Stall Recovery

The fear on Wall Street is that nervous consumers (non-believers) are going to short-circuit the economic recovery.

Stocks fell sharply this past Friday, taking the major indexes (NYSE & NASDAQ) down about 1 percent, after investors were disappointed by reports that the Reuters/University of Michigan index of consumer sentiment fell significantly short of expectations for the first part of August. That’s a sign consumers may well keep cutting back their spending as they worry about losing their jobs and furthering economic woes. Consumer spending is crucial for the economy to emerge from recession as it accounts for two-thirds of all U.S. economic activity.

The discouraging reading came a day after the Commerce Department reported a rather unexpected down trotting in retail sales, which was not suppose to happen this time of year as August has typically been a big month for retail. Investors were able to shake that off, but Friday’s consumer sentiment number had them bailing out of stocks, jeopardizing a summer rally that had lifted the Standard & Poor’s 500 index more than 15 percent in about a month.

Investors also sold off oil and other commodities and moved their money into the relative safety of the dollar and government bonds. Treasury prices jumped, sending their yields lower, while the dollar rose against other major currencies.

After rallying for months on expectations of an economic recovery, investors are worried that they have been too optimistic, given consumers’ continuing reluctance to spend. Analysts are predicting that the market may be choppy for several more months and this recession will continue to drage on with consumer confidence not as high as expected.

After the consumer forecasts were released the Dow Jones fell slighttly (0.8 percent). The S&P 500 index fell 8.64, or 0.9 percent, to 1,004.09, while the Nasdaq composite index fell 23.83, or 1.2 percent, to 1,985.52.

The drop erased much of the market’s advance of the last two days, and gave the big indexes their first losing week after four weeks of gains. The Dow was down 0.5 percent for the week, while the S&P 500 index fell 0.6 percent and the Nasdaq was off 0.7 percent.

In other trading, the Russell 2000 index of smaller companies fell 11.29, (or approximately 2%).

Bond prices rose sharply. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.57 percent from 3.62 percent late Thursday. The drop in the 10-year yield is good news for consumers because it is closely tied to interest rates on mortgages and other loans.

Cash for Clunkers Program Working?

Cash for Clunkers is a government stimulus plan enacted to help the struggling automotive industry in America. There are many different opinions on this program, but most agree that it is working in the short-term, at the very least. Some say it is a success, though others believe it will lead to long-term tragedy.

This program provides consumers with up to $4,500 when they give up their old “clunker” to be destroyed. They are then expected to purchase a new car with their monetary gains, thus stimulating the auto industry. This strategy appears to be working. Everyone likes free money and a new car. It should be stressed, however, that this is not a long-term solution to the United States’ economic woes, nor is it particularly intended to address anything but the issues of the auto industry.

Despite its narrow focus, it has ended up influencing the stock market in positive ways, some of which are quite unexpected. For example, platinum stocks are skyrocketing due to the fact that platinum is used in car manufacturing. Savvy investors can make quite a profit if they read the market right. Besides these side benefits, the Cash for Clunkers program has definitely helped boost car sales, at least in the short-term. The auto companies who did not experience higher sales rates reported that their losses were still significantly less than had been expected.

It may be too early to label the Cash for Clunkers program a success or a disaster, but it is still certain that profit can be made from it. Hopefully, its current benefits will lead to stock market boosts and eventually full success.

Mutual Fund Commissions

Before investing in stocks, it is advisable to research the difference between commission based and commission free mutual fund companies that you are considering. Since the goal for investing is to make money, it is wise to weigh the pros and cons of these two types of mutual funds. Before deciding, request a report that covers the performance over the last five to ten years, keeping in mind its annual return, since its beginning. With this information you can literally “do the math” and determine whether the added fees will help you make money or lose money in the life of your investment. Oftentimes you will find that a commissioned or loaded fund has a lower annual maintenance fee.

A commission based fund is simply an investment opportunity where the investing company adds an extra fee to the mutual fund. Unfortunately, since you are leaving your choice of mutual funds at the discretion of someone else, you do not know if they are putting your money in a fund that they know something about or if they are just putting it in a mutual fund for the fee. You will need to research your investment group as well before making your final decision.
A commission free mutual fund is an investment opportunity where the the company chooses a fund and only charges you a maintenance or annual fee for handling your money. Once again, doing your own research on the company that you are interested in is the best way to determine which direction you need to go with your investment.