It has been five years since the collapse of the financial markets. Five years ago, the world financial systems were on the brink of collapse. For five years, we have been crawling out of a deep hole. You cannot get very far by crawling, but if one moves forward a little-by-little for five years, how far we have come will look very impressive.
Let's just look at the stock markets. Early in 2009, the Dow Jones Industrial Average bottomed at just under 6,500 in reaction to the crisis. This year, the Dow has topped 15,500 more than once. That is a gain of approximately 140 percent in just under five years. Even more impressively, the gain does not seem to be slowing much as the rally matures. Through the latter part of September, gains had exceeded 15 percent for the year.
Every time the markets look like they are in the middle of a correction, they seem to bounce back nicely. This year, the market has been impacted by rising interest rates and the situation in Syria. Each time there is a pull-back, it is brief and then a comeback ensues. One must ask if there is more room on the upside after such a run.
The answer boils down to two issues. First, will the economy keep recovering at a decent pace? Second, will this recovery cause interest rates to rise high enough to slow down the train?
The economic recovery is definitely stronger today, paced by a recovered auto industry and recovering real estate markets. But it still has not been strong enough to create enough jobs to replace those lost in the recession, let alone keep pace with population growth. The statement released after the meeting of the Federal Reserve Board last month echoed that concern. Growth that is too strong might actually turn out to be a recipe to slow the stock run we have seen.
Of course, there was also an intervening variable that affected the Fed’s decision. The decision by the Fed was made approximately two weeks away from a showdown regarding the decision to raise the debt limit. If Congress does not resolve their disagreements (which they haven’t), the government’s Oct. 1 shut down and the economy’s forward progress will surely be adversely impacted.
On the other side of the coin, if economic activity does increase significantly, rates are likely to rise higher more quickly. The resulting higher rates could slow down real estate activity, as well as spook the markets into a real correction more quickly as well. The Fed’s decision temporarily gave the interest rate markets some breathing room towards the end of September as the pause in rate increases also buoyed the stock markets once again.
Dave Hershman is a top author in the mortgage industry with seven books published, including The Complete Mortgage Management Kit. Dave is also director of branch support for McLean Mortgage. He may be reached by e-mail at [email protected]
or visit www.originationpro.com.