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June 10, 2010
Stock markets are considered to be good leading indicators of future economic activity. Company values, or share prices, are based on expectations of future earnings, and future earnings are based on expected company revenue growth and profitability.
Recently, markets (Nasdaq Composite, S&P 500 stock index, Dow Jones Industrial Average) have taken a turn after an 80% increase in the broad averages from March 2009 to April 2010. The months of May and early June 2010 have witnessed sharp declines. What’s going on? Perhaps just a normal adjustment after a strong run-up in prices or is there more to it?
In the business pages the news of the day is more telling: Ben Bernanke, chairman of the Federal Reserve warns that “the federal budget “appears” to be on an “unsustainable path” and the recent report of economic activity from the June ‘beige book’ released Wednesday notes that economic activity improved across the country: manufacturing picked up, retail sales grew, and housing was helped by the now expired tax credit, and a ‘modest’ recovery was unfolding. The Economic Optimism Index released this week, however, reported that consumer confidence fell sharply over the last month on continued job worries and fears about the future as uncertainties multiply: when will interest rates rise, what will new tax rates look like (after the Bush tax cuts expire), what will ObamaCare really cost, what will cap & trade and new energy policies cost, will ‘card check’ pass, and how much stronger will unions be, how will the financial sector be altered by new regulations. There is hardly a shortage of concerns out there at the moment.