With profits exceeding analyst forecasts and a debt-ceiling agreement reached, there was reason to believe that the market might be ready to reverse direction and head back up last week.
Given the expectation of continued strong profits, it looked like the S&P 500 could reach the 1,400 to 1,425 level by year end (it’s high so far this year was 1,370). Now though, the chances for that level of price appreciation are increasingly appearing remote.
Consider why:
- Credit rating downgrade. The U.S. government had maintained a perfect AAA credit rating since 1917 until Standard & Poor’s downgraded it to AA+ on Friday.
- Sovereign-debt crises. Europe’s troubles have spread far beyond Greece. Ireland, Spain, Portugal and now Italy are all financially unfit.
- High unemployment. Unemployment remains above 9%, in spite of the $814 billion economic stimulus program, extension of the Bush-era tax cuts and two rounds of quantitative easing.
- Low economic growth. Earlier in the year, many were concerned that gross domestic product grew at an annual rate of just 1.9%. It turns out that figure was too generous. The Bureau of Economic Analysis revised the first quarter growth rate down to 0.4%, while the economy grew at an annual rate of just 1.3% in the second quarter.
- The debt crisis. While last week’s agreement reduced future spending by an estimated $2.5 trillion (assuming the projected cuts all take place), keep in mind that the agreement allowed government to add $2.5 trillion in new debt, which would raise the ceiling to $16.8 trillion. It also leaves Medicare, Medicaid and Social Security untouched – even though they represent $61.6 trillion in unmet obligations.
Suddenly, the 1990s seem like a lifetime ago.