Do we have ‘irrational negativity’ about the US Markets and Economy? By Ken Mahoney

In his famous "irrational exuberance" speech on December 5, 1996, then Federal Reserve chairman Alan Greenspan posed a rhetorical question: "How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?” With those words, he underscored the influence that emotions can have on financial assets.

Thinking along these lines, it is interesting to note that if there is such a thing as “irrational exuberance”, the opposite must also exist. Let’s call this converse emotion “irrational negativity”. Is there such a thing? The ABC News Consumer Comfort Index is a rolling average based on telephone interviews with 1,000 randomly selected adults over the previous four-week period. Last week, 89% rated the economy negatively, while only 54% rated their own finances negatively. Translation: People think we are worse off than we actually are (irrational negativity).

For the year, the S&P 500 is up 0.94%, the Dow is up 1.72%, and the Nasdaq is up 2.05%. Company earnings are strong, and stocks have moved steadily higher in September thanks to a series of encouraging signals on the economy. Despite this fact, gold set another record last week, and Treasury prices edged higher in a sign that investors remain cautious.

Will people eventually come around? There are reasons to believe they will. One good sign is that Americans are spending more. The U.S. Census Bureau announced Tuesday that consumer spending rose 0.4% from July to August, and 3.6% from 12 months ago, with retail sales up 0.5% and 3.7% respectively. This was the 10th month in a row of year-over-year growth in consumer spending estimates from the Census Bureau, following 14 months of year-over-year declines. All told, Americans spent $363.7 billion at retailers in August – the most since April. Since consumer spending accounts for more than two-thirds of the U.S. economy, this provides yet another silver lining in what many still view as confusing times.

Key things to watch this week:

Monday – Housing Market Index
Tuesday – Housing Starts, FOMC Meeting Announcement
Thursday – Jobless Claims, Existing Home Sales, Leading Indicators
Friday – Durable Goods Orders, New Home Sales

Data as of 09/17/2010 1-Week Y-T-D 1-Year 5-Year 10-Year
Standard & Poor's 500 1.45 0.94 5.64 -1.81 -2.32
Dow 1.39 1.72 8.42 -0.06 -0.29
NASDAQ 3.26 2.05 8.88 1.44 -3.96
MSCI EAFE 1.55 -2.98 -2.40 0.72 -0.19
10-year Treasury Note (Yield Only) 2.80 N/A 3.40 4.26 5.83

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance, Google Finance, Barron’s, djindexes.com, MSCI Barra. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.

HEADLINES:

President Obama named Harvard law professor Elizabeth Warren a special adviser Friday and tasked her with setting up an agency to look out for consumers in their dealings with banks, mortgage companies and other financial institutions. Calling Warren "one of the country's fiercest advocates for the middle class," Obama said she would ensure the Consumer Financial Protection Bureau ends abusive practices.

Americans' net worth – the value of assets like homes and investments, minus debts like mortgages and credit cards – fell 2.7% last quarter, or $1.5 trillion, the Federal Reserve said Friday. That left net worth at $53.5 trillion – above the bottom hit during the recession ($48.8 trillion in the first quarter of 2009), but below the pre-recession peak of $65.8 trillion.

General Motors announced Friday that it is planning to invest $483 million and add 483 jobs to its engine plant in Spring Hill, Tenn.
The number of people with health insurance in the United States dropped for the first time in 23 years, the U.S. Census Bureau said Thursday. There were 253.6 million people with health insurance in 2009, the latest data available, down from 255.1 million a year earlier.

After months of debate and significant pressure from the White House, the Senate on Thursday passed a $42 billion bill aimed at helping small businesses. The measure is expected to create 500,000 jobs, according to a Senate summary of the bill.