The equity market sprinted forward too fast compared to the slow-moving and steady economy. In the 5 years since the end of the Great recession, the Dow Jones Industrial Average (DJIA) increased by 83.9%, from 9,221 in Q2 of 2009 to 16,954 in Q2 2014. At the same time, the Gross Domestic Product (GDP) increased by 20.8%, from $14.3 trillion to $17.3 trillion over the same time period.
The current volatility and slow down in the equity market is the result of sprint syndrome. After running too fast for too long, compared to the economy, the equity rabbit is catching its breath, which will give the turtle economy a chance to catch up a bit.
The vital signs of the economy are healthy. In September, employers added 248,000 non-farm jobs bringing the three-month average to 224,000. Energy prices keep on dropping, which is likely to free up more money for the holiday-season shopping. Additionally, the October preliminary Money Anxiety Index at 69.2 is below the 50-year average of 70.7. This is the first time in the past 6 years that the Money Anxiety Index dipped below the 70.7 level signaling that consumers are responding to the gradual improvement in the economy.
The Money Anxiety Index measures consumers’ level of financial worry and stress. Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s. The Money Anxiety Index Is highly predictive. It signaled the arrival of the Great Recession over a year prior to the official declaration of the recession in December of 2007. The money anxiety Index was developed by Dr. Dan Geller, who is an expert in behavioral finance, and the author of the book Money Anxiety.