By: Todd Wheatley
(c) IQ-2k   07-12-10

June 2010 ended with the Dow Jones Industrial Average dipping below the psychologically important 10,000 mark for the second time this year. More importantly, the "V- shaped" recovery that looked so promising this Spring fizzled and stalled. So while technically the United States maneuvered out of the recession the economy has effectively flatlined. So it seems that the Dow Jones Industrial Average has ceased being a leading economic indicator becoming, in effect, a mere barometer.

In the next few days, however, quarterly earnings reports and other economic news will stress the value of consumer spending as government spending slows while adding that this year is an improvement over the last. Yet given the relative Spring strength a cautious optimism will take hold pushing the DOW up. Next short- term speculators taking the up-beat position will move the DOW up further. Finally the sheep move in making conditions ripe for profit taking. But that doesn't mean everything is coming up roses.

By Fall a more pessimistic view creeps in as the 2010 campaign rhetoric heats up and turns nasty. Profit hungry wolves aided by politicians and the media machine will drag the Dow down again. Perhaps back to the 10k mark ... again, a flatline ... the same economic reality mentioned in my article "The Economy : Econ 101" (1-31- 10).

The media will invariably report that the late year Dow Jones decline is due to a weakening in consumer demand, the European debt crisis, a further weakening of the housing market, or some other plausible, but incorrect reason. In reality the Dow Jones will reflect the flatline malaise brought about by economic uncertainty and a global labor restructuring. Unfortunately both the uncertainty and labor restructuring will persist beyond the November election allowing the current market psychology to remain.

Even emerging-market strength in China and India has waned. Only the development of some exciting new technology provides hope for a long-term up-trend. In other words a fundamental economic shift has occurred. Not only has the stock market reached a long-term peak so has the tech wave. That's not to say that technology will cease its advance, but radical new game changers like the silicon microchip that started this revolution are unlikely to surface for some years. The logical outcome would be a corresponding shift in market philosophy.

But as it stands, market fundamentals are losing ground to psychology as more and more investors jump into the fray. Market savvy investors no longer dictate market movements as in yester years. Rather the market has taken on a herd mentality. Hence upticks in the market do not necessarily lead to upticks in the economy.

At any rate the common investor would do well to drop old strategies like "dollar cost averaging", "buy & hold", and "portfolio diversification". But the propensity of average investors to deal with mutual funds, IRAs, and 401Ks make the so-called "old" strategies hard to disengage from. Though hopefully some form of dynamic asset allocation will assist a change. Just remember, money never sleeps so more than ever it is important to keep on your toes.

Unfortunately many media analysts and stock brokers have a vested interest in "business as usual". They want to keep the gravy train rolling and bring the sheep to pasture. Only Jim Cramer ("Mad Money") stands out with spot-on analysis and consistently good advice. Albeit with an eccentric entertaining zeal. Finally for those who listen to famed Wall Street mogul Warren Buffet ...

>> The serious investor finds and accumulates value stocks for the long-term irrespective of market conditions <<

In other words, do your homework and buy individual stocks ONLY WHEN THE PRICE IS RIGHT. All that said, it is not the intention of this article to recommend and weigh the value of various stock market strategies. This article is about the more important issue of assuring retirement benefits in an uncertain age. Since an increasing portion of the American workforce have become "stockholders" (quote - unquote) the not so logical operation of stock market must be understood along with its associated risk. And it should be known that the stock market is not too dissimilar from a casino (i.e. huge losses are possible).

Though given the complexities of market operations many will still choose one of the aforementioned "old" strategies to survive. But again to their own peril. A new economic reality is upon us. Substantial long-term wealth cannot be assured in this market environment. Even more alarming are the efforts by the "Tea Party" and other ultra conservative to make the stock market the de facto source for all retirement funds. Certain disaster would come upon the economy if those plans are allowed to go forward.

At first the architects of such plans would look like geniuses as huge initial gains inflate a market bubble. Though as we have seen time and again over the past 30 years ... bubbles pop. Alternatively the need for answers will propel many free market fanatics into power in the upcoming elections. In short, the country needs real answers not simplistic slogans like "smaller government", and "unregulated free markets".

History has shown that corporate entities will do anything to make a buck including child labor, hazardous working conditions, polluting, collusion, and outright fraud. The laissez-faire free market of the 18th century will not work in the 21st century and if we start moving towards a stock market only retirement system millions of households will lose everything.


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