New Stock Market Alert : Summer Time Blues

New Debt Tip : Prudent Mortgage Refinancing Isn’t About Getting a Lower Payment

I had the opportunity to go on vacation last week. My family and I went to Red River, New Mexico. I guess this was good for me. There was no internet where we were staying. The satellite went in and out not giving me much access to news. My iPhone would work only when we were in town. So, for the first time in as long as I can remember, I was literally out of touch with the crazy world of markets.

It gave me some time to think through what was happening in the economy and stock markets without the constant interruption of market news. There are so many various risks that you could consider right now. In thinking through it, there is one risk that should be followed by an explanation point. In fact, it is one risk that I think will ultimately be a real problem for the stock market.

Allow me to take you through my thought process. We invest money in order to make it grow so that we can use it for specific financial goals down the road. Unfortunately, things aren’t always rosy when it comes to the wonderful world of investing. There are periods of time when you can lose a lot of money. So, you have two choices. First, you can just buy and hold and HOPE that everything works out well in the end. I adamantly disagree with the financial services industry that you just hold tight and take the losses during those times. Second, you can be more proactive and reduce risk (reducing how much money is invested in any type of stocks or stock funds – for further explanation see below) and reduce the potential for losing money.

Today, it is tough to consider reducing risk in the investments. If you listen to politicians and Wall Street, the worst is behind us. Thus, it would be crazy to reduce your risk now. Then you start thinking of all of the craziness that is occurring. I think you would agree that it is risky out there but to what extent?

This is what every 401(k) participant and anyone invested in stock needs to know about risk. For me, there are many known and unknown situations today that create risk for investors. However, there is one that is easy to explain and one that I feel will ultimately spell a great deal of trouble for those who are not proactive. It comes down to what I would now refer to as the unemployment crisis.

Think through this cycle with me. For the stock market to be positive, we need a positive economic outlook. For a positive economy, we need consumers to spend money. For consumers to spend money, there needs to be plenty of jobs. Unfortunately, the unemployment situation gets bleaker as the months go by.

Before I write about it, let me make sure that I debunk a few counter-arguments. First, Wall Street will tell you that you are looking at the past when looking at the unemployment report and that things could already be getting better. Unfortunately, we look at unemployment numbers on a weekly basis and those are real time. Those look just as bad. Second, Wall Street will tell you that things always look bad before they get better. When there are no real solutions, unemployment can get much worse.

The latest unemployment report showed 467,000 jobs were lost. That was after the Government “estimated” 185,000 jobs were created (for an explanation of how these estimates work, read this report). If you didn’t count that “estimate”, we would look at a loss of 652,000 jobs for just last month. Since the beginning of the year, the Government has “estimated” over 500,000 jobs that were created out of thin air. Out of those 523,000 “estimated” jobs that were created, 56% of those jobs were “estimated” to be created in the…Leisure and Hospitality Sector. Of course, you could see where the Government would assume that sector is hot. After all, think of all of the money that Americans are spending in the Leisure and Hospitality Sector during the greatest recession since the Great Depression (please note the sarcasm).

The “stated” unemployment rate of 9.5% is the highest in 26 years. The Department of Labor has another employment rate that they follow, which adds back into the total, the workers who fall out of the system. That rate is 16.5%. Shadow Stats, which is a company that takes economic data and calculates the real numbers, shows an unemployment rate of close to 21%.

President Obama reassures everyone that this problem is getting fixed. He claims that many of these “infrastructure” projects are about to be started. In other words, he is about to create a handful of jobs to work on infrastructure projects. This is far from a fix for unemployment.

So this remains a major risk for the stock market and why I will continue to suggest that investors consider the risk that they are taking. Yes, the market could start to look better and could start making money for a period of time. However, any gains are going to be tough to sustain with this unemployment crisis hanging over our heads.

Note: You manage for risk two ways. First, you reduce your exposure to stocks and stock based funds. This is a very general strategy for reducing risk. Second, you can also have someone manage your money for risk.

Tags: 401(k), Bob Brooks, Deceptive Money, Department of Labor, economic data, economy, financial goals, financial services industry, Givernment, internew, Investing, jobs, news, politicians, President Obama, Prudent Money, risks, Shadow stats, stock funds, stock markets, stocks, unemployment crisis, unemployment report, vacation, Wall Street