US market update.

19th August 2011

“Last night the Dow Jones lost 420 points after the Federal Reserve Bank of Philadelphia said its index of manufacturing in the region fell to minus 30.7 in August – the weakest reading since March 2009.

Investors interpreted the reading as a signal that the US was entering a recession and provided one more dose of uncertainty to markets already dealing with Europe’s debt crisis, and the aftermath of Standard & Poor’s downgrade of the U.S credit rating.

Although there are real economic indicators to be concerned about, I believe the degree of the reaction is very much overdone and bordering on hysterical.  It is very clear that we currently have an equity market driven by fear and emotion, and one that is ignoring investment fundamentals.  Yes, it is likely that the US economy is deteriorating and may expand less than previously forecasted in 2011 and 2012 because of potential political paralysis and fiscal tightening, but fears of a new recession are overstated.  I believe that we are seeing a slowing of growth, not a collapsing economy.

This view is also being aired (but ignored by the market), by some of the regional Federal Reserve Banks, and supported by for example, the Federal Reserve Bank of New York President, William Dudley, who stated during a speech in Newark, New Jersey on 18 August 2011, that “we very much still expect the economy to recover, with growth during the second half of 2011 being ‘significantly firmer’ than in the first six months, and the risk of recession remains ‘quite low’.”

I am not the only person to believe that the market has overreacted and is being driven by fear, rather than economic reality.  William Buffet, the billionaire US Investor, recently stated that this market decline provided an opportunity for buying stocks on sale.”