Joe Brown

Brown Advisory Group, LLC

Look Out For The Falling Stock Market

Remember, years ago when dad went to work at the company, he received a livable wage, had a pension, Mom was a homemaker, health insurance was provided, and extended careers were the norm.

Fast forward to the 21st century and see how it compares.

Beginning in the mid-1990s the word “outsource” began creeping into our dictionary. Then came the Private Equity firms with their lobbied tax advantage, and the squeeze for the bottom line started.
America was built on free enterprise and the drive for profit, but at what cost does that profit cost, not in bottom-line numbers but human sacrifice? This is not a liberal communist criticism of our system; it is merely a reflection of the changes we have seen these past 20 years.

Here is my theory of why the stock market is overpriced and why a correction is overdue. My guess is the correction will be well over 3,000 points, and millions of baby boomer significant dollars will be wiped out, dollars needed for retirement, children’s education, and financial stability.

Stuff: How much more stuff do we need. My guess is the American shopper is shopped out. Signs of this are clear if you happen to visit a local mall. This was extremely visible during a visit to Northern California to an “upscale” shopping mall. In the past the waiting time for space was years, now vacancy is I would estimate at 15%. Could it be that shoppers have ridden the wave of wealth and now the revolt against spending is a new movement? Maybe they have spent too much of their money? If the malls of America cannot keep shoppers in them, it is a sign to me that the shopping bubble is shrinking. Without mall spending, corporate profits will level off or shrink, the mall index (my term) is an indication of the tip of the wave. Shoppers always lead the way in our economy.

I am not the only one saying this. According to a Dow Jones research paper, the American consumer accounts for over 35% of the U.S. Economy. Take a look around the next time you visit your local mall; there are a lot of “Coming Soon” signs on storefronts.

The U.S. Government also tracks consumer spending via the U.S. Consumer Confidence Index (CCI). This index helps measure consumer confidence based on spending and is an indicator of our economy’s strength. Currently, the index registers a Consumer Confidence level of 90.1 which is considerably down from its high watermark of 144.7 at the end of the Clinton Administration.

Corporate Accounting: Congress is lobbied with such intensity that nearly every elected official is approached 35 times per week by a lobbyist. Many of these represent the corporate interest, and the greatest of these is lobbying for accounting changes, changes corporations can use to increase their bottom line. More “legal” methods are being used by large American Companies to lower their tax liability than at any time in history. Why would the large American company, Apple, keep $15 billion offshore, why not place it in American banks. Apple is doing nothing illegal; they are merely using the system set up by Congress to their advantage. In doing so, they are lowering their tax position, all legal and approved by Congress.

In addition to “gray” accounting issues, the debt market has offered a massive opportunity for corporations to expand and grow, but are they? I think not many corporations are using the low debt opportunity to buy back stock, exchange previous bond issues, and set up foreign operations where very low-cost labor is replacing American jobs. All funded with low-interest money and with congresses full approval, foreign outsourcing.

In essence, American corporations are slicing and dicing the old system with layoffs, tax hedges, and outsourcing to gather the most significant number at the bottom line. While this may be good for stockholders and senior management, what does it do for our economy? What happens when there is not much left to hack away on? This will cause the market to begin its correction when companies do not make their profit estimates. Cutting costs have driven profits, but how much more can be cut?

Baby Boomers: Every day, 10,000 baby boomers enter the retirement stage of their life, time to relax and enjoy their life’s work, time for the pension, and social security to begin. The baby boomer movement will continue at this level of retirement for the next 14 years, What happens to their savings at retirement, do they keep it invested in the market, or do they begin the gradual shift to safety and security? My guess is they will start to move their funds to more stable investments such as banks and fixed-rate annuities, with lesser risk. After all, they are no longer working, and their ability to re-enter the workforce and re-make money becomes more limited with each passing day. As the boomers begin their withdrawal from the overpriced market, who will be replacing them? The answer is simple math; there are far too many boomers than the next generation of investors. No one will replace them, at least not in the numbers needed to sustain this long market rally.

Boomers, accounting, and stuff. These will combine to start the correction of the market. How far will it correct, who knows, my guess is at least 20% if not more. What happens to those who need that 20% for their retirement, do they hold or do they sell and run to safety?

When the crisis of 2008 hit our economy, many people were like a “deer in the headlights” frozen with no idea which way to move. A very famous movie star was quoted “ I had $200 million invested, and almost overnight it became $100 million, I sold because I didn’t want it to become $50 million” in other words he panicked and took the loss. What happens if the investor has $200,000 instead of $200 million, and it becomes $100,000? Do they sell or do they hold?

Emotion generally wins, and with this artificially inflated stock market driven by bottom-line greed corrects, how many innocents average people will be that dear? If safety and security are your diving factors, consider making changes while your money is still intact, and don’t wait for the last few dollars to accumulate in your account, they might not be there.

Joe Brown picture

Joe Brown

Brown Advisory Group, LLC

2445 Darwin Rd.

Suite 105

Madison, Wisconsin 53704

(608) 241-4425

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