How "Depressed Data" Hurts the economy

It is no secret that market indexes like the Dow Jones Industrial Average have made a roller coaster seem like a little speed bump.   These drastic “shifts” in the market are unfavorably becoming the norm.  Unfortunately, this trend is going to continue. 

“Depressed Data” (lowering economic and financial expectations way down) is causing the market to rally under false pretenses, which in turn is giving way to excessive downturns in the market.  By lowering expectations, or depressing data, the market is being artificially inflated to move upward on subpar news.  When the market is being propped up on insufficient data, its foundation becomes weak; which paves the way to excessive volatility.   This strategy of being “overly optimistic” is causing an unnatural rise in the market.  For example, the market has rallied several times in the past couple of years when the unemployment filings went up.  Since unemployment filings came in below expectations (unemployment was lower than the data anticipated) the market rallied as a positive, or optimistic, sign.  Only because the depressed data showed unemployment filings were not as bad as initially thought, the market rallied accordingly.  This approach to sustaining growth in the market is not without consequence. 

Consumer confidence in May 2012 dropped to a 5 month low as investors are becoming more cynical about the economy.  Who can blame them?  Volatility has been present on a seemingly day to day basis, and despite what the talking heads say there seems to be no long term solution in sight.  This is a trend that needs to change to reverse this effect.  The problem is that Wall Street is not concerned about how the market gets propped up, only that it happens.  Simply put, this is a short term solution to a long term problem that is not going away.   

Because of the depressed data and the expected volatility, investors are using methods known as annual reset to lock in their gains on an annual basis without the threat of volatility.  Annual reset is able to do this because returns investors receive with this strategy are not stocks or securities, and therefore are exempt from volatility associated with securities.   These capped earnings guarantee that your money will never go backwards, or lose value, to any external events.  In fact, investors that implemented this approach prior to 2001 never lost a penny during 09/11/01, nor the financial collapse of 2008.  If you compare the average return of a $100,000 in the market (S & P 500) to this strategy from 1998 to 2011, annual reset outperformed the S & P 500 by at least $50,000 in most cases.  30 years ago these returns would not be typical; however they are today due to the volatility and Federal stimulus.

This is why investors are exploring fresh tactics in order to offset their losses, and instead are taking advantage of moderate returns.  They are embracing financial guarantees which are absent on Wall Street.  Investors are taking comfort with strategies of lifetime income and tax deferred growth just to name a couple.