Irrational Pessimism

A new financial term has just arrived, irrational pessimism. About 12 years ago, Alan Greenspan former Federal Reserve Board Chairman, proclaimed that the stock price was too high and called it irrational exuberance. Now that stock prices have returned to levels not seen for 12 years the opposite term has been coined, irrational pessimism.

The meaning of the phrase is that by using a valuation model the current level of stock prices are too low. It could also mean that people are listening to the news media who are getting ratings by publishing only negative financial information. Make no mistake, a lot of negative financial information exists and bad news is good business for the news media. Some better than expected news this week that got little air time included higher retail sales and higher consumer credit usage. Some of the recent economic data suggests that some parts of the economy have begun to improve.

Two issues remain, consumer credit for large ticket items and toxic assets. Currently, the consumer credit fix is the Federal Reserve TALF program that just started this week. This should greatly improve consumer credit in the future. For toxic assets, the much discussed mark to market rule is a major contributor in creating them and this rule needs to change. Next week, this rule is scheduled to be debated in Congress and the hope is that someone gives them good advice and this rule is changed.

Since 1926, the stock market has never corrected more than once in any decade, let alone during the same presidency. The stock market correction for this recession is worse than any other recession. We are unfortunately watching history being made. It is not possible to know when the stock market will reach a bottom, even if people are acting with irrational pessimism. It is important to keep your focus on the important things of life like faith and family during this very turbulent time.