The Friday after Thanksgiving is traditionally a quiet day in the market, so I chose to work remotely from our daughter’s dining room table that morning. We’ve come to accept a “new normal” with economic activity, so as I fired up my laptop it shouldn’t have been a big shock to see a down day in the market as the news from Dubai unfolded.
If there were any lingering doubts about whether financial markets are now truly global, these should’ve been dispelled by the Dubai World announcement. The developer – responsible for all those palm-shaped islands and the world’s tallest skyscraper in Dubai’s quest to become the Middle East’s most cosmopolitan tourist destination – requested six months’ delay in paying back an estimated $60 billion in debt. Fears that international banks could suffer major losses arose at once. Financial markets from Shanghai to London to New York went into sharp declines, as investors seemed to immediately opt for safety and liquidity.
The Dow Jones Industrial Average (DJIA- an unmanaged index of 30 widely held stocks) dropped 154 points that day, much of which was attributed to Dubai World’s default. The Dubai-induced selling was exaggerated by the limited audience on the day after Thanksgiving, leaving sellers to sell into a vacuum.
Yet, that should have come as no surprise, as the handwriting was on the wall back in 2006, when 24 percent of the world’s construction cranes were operating in Dubai. If that’s not the sign of a bubble, I don’t know what is. Moreover, last year and most of this year, there were numerous stories hinting at the pending economic collapse as Dubai’s airport became repeatedly clogged with abandoned cars left behind by debt-ridden, laid-off foreign workers who were fleeing the country to escape Dubai’s “debtors’ prison.”
No, in my opinion, the Dubai debacle is the result of the fallout from the previous bubble and not the start of another round of emerging markets’ systemic crisis. The panicked reaction was fairly short-lived. As November ended, international economic recovery seemed to be back on track.
While it may be a soon-forgotten blip in the global financial recovery, the Dubai World incident indicates how susceptible investors and the major financial markets have become to bad news. Apart from that, however, international and U.S. markets have been moving along the slow recovery track projected by many economists.
At the close of November, the Dow Jones Industrial Average stood at 10,344.84, up 6.5 percent for the month and up 17.9 percent for the year to date. The NASDAQ Composite (an unmanaged index of common stocks listed on the NASDAQ National Stock Market) finished November at 2,144.60, up 4.9 percent for the month and 36 percent for the year, and the S&P 500 (an unmanaged index of 500 widely held stocks) stood at 1,095.63, up 5.7 percent for the month and 21.3 percent for the year.
Modestly optimistic reports during the month encouraged the view that the recovery is proceeding. Consumer spending in October rose 0.7 percent, which may not seem like much until you compare it to the 0.6 percent decrease in September. New home sales rose 6.2 percent in October, higher than had been forecast, and orders for basic manufacturing materials – electrical equipment, commercial airplanes and parts and steel, as well as fabricated metals, rose, too.
Interestingly enough, the savings rate dipped from 4.6 percent in September to 4.4 percent in October, indicating Americans are drifting back into a spending mode. It was no surprise to learn that the November Consumer Confidence Index moved up to 49.5 from its 48.7 reading in October – a good sign, but still a long way from the 90 that historically shows the economy is on a strong footing.
Many questions remain as 2009 nears its end, but the slow, sometimes unsteady, recovery seems to be holding. This can be the ideal time to review your portfolio to determine whether adjustments are needed to keep it in tune with current market realities and also whether your current asset allocation matches yours goals. Stay focused, nimble and invest accordingly.
Past performance is not indicative of future results. Investors cannot invest directly in an index.
Darcie Guerin, financial advisor and branch manager, Raymond James & Associates, Inc. 606 Bald Eagle Drive, Suite 401, Marco Island, FL 34145, provides this article. Gulfshore Life magazine named Guerin as one of the Best Personal Wealth Managers in the Southwest Florida area for 2009. If you have questions, e-mail her at Darcie.Guerin@RaymondJames.com or call 389-1041, toll free (866) 343-0882 or visit RaymondJames.com/Darcie. Past performance may not be indicative of future results.