Return To Basics For U.S. Consumer

A year after the biggest financial meltdown since the Great Depression rocked the Globe, it seems like  Americans are behaving today much like Americans did then.

 Savings rate are sharply higher today than a year ago and it seems Americans have somewhat changed their views toward investing and financial risk in general. The stock market rally of the past 6 months has been predicated on one major factor. That the consumer will resume their spending ways and that Americans will go back to their pre- crisis views towards risk both of which I believe will not fully recover for some time.

 It is a fact that we as Americans have a remarkable ability to pick up the pieces and roll the dice once again after a set back. This risk taking mentality is  part of what makes our nation the greatest in the world. After all what would happen to ingenuity and industrial progress without risk taking?

 There is no doubt that people are again investing. The stock market is up 60% since hitting a 12 year low on March 9th but many financial planners around the nation say that people are returning to basic principles of financial planning that for most, had been put aside for some time. Principles such as maximizing savings and limiting use of credit cards are once again important considerations for many Americans.

 The fact that Americans are saving more and taking less financial risk is in my view, a good thing for the economy. After all, excessive use of very cheap credit and excessive risk taking is the poster child for this financial crisis. 

 The fact that Americans are taking fewer financial risks and using less credit is not so good for the stock market. At least not in the short term as it flies against the very basis of what the Federal Reserve has attempted to do with its loose monetary policy. Even in a market flooded with liquidity, credit is still difficult to secure by everyday Americans and banks do not seem to want to move away from very tight lending standards. If the U.S. economy is 70% consumer based, then it does not take much insight to arrive at the conclusion that without the consumer engaged, the recovery will be tepid at best. Factor in a continued difficult job market and the picture gets even murkier.

 This is the basic thesis of my bearishness towards equity markets today. Not that I believe we should be trading anywhere near the lows of March but, I do not see the rationale behind the market trading at these levels. Sure there are great individual company success stories out there but overall, we are extremely ahead of were we should be even if the rosiest scenario comes to fruition.