What You Need to Know About the Market Bounce

Monday saw the sixth-largest point drop in the Dow Jones Industrial Average’s history. Tuesday saw violent whipsaw action, with the DJIA ending almost 4% up after a lukewarm Fed announcement to keep interest rates low. Here’s why neither of these days really matter.

The first thing you should do when you think about the beginning of this week is stop thinking about the beginning of this week. That goes double for anyone out there who is a small individual investor. Felix Salmon advises you to do nothing, or maybe to buy stocks, sell bonds. But these two insane days — one of which was a top 10 worst day and one which was a top 10 best (time stamp 4:55 on Tuesday, no permalink) — taken on their own only tell us what’s obvious: the market isn’t operating under any clear rules.

What was true last week, before the S&P downgrade, before Monday’s panic, and before Tuesday’s Fed announcement is still true today. The US has a very weak economy that is in serious danger of falling into a second recession, and a political and media class that is incapable of accurately describing the problems facing the country or prescribing solutions to ease the suffering of the permanent underclass in America.

And lest you think permanent underclass is too shrill a phrase to use to describe people facing poverty in America, consider some recent findings. Nearly one in six American families is on food stamps. The median net worth of white households is 20 times that of black households and 18 times that Latino households — a gap that has widened during the recession. The real unemployment rate is at least around 16%, higher, again, for blacks and Latinos.

These past two days on Wall Street don’t change anything for the majority of Americans, because there is still no engine for growth in America. The Fed’s announcement today that it will keep the federal fund rate (the rate at which banks lend to each other, usually overnight) at between 0% and 1/4% is completely underwhelming. It’s essentially the same policy they’ve been implementing. And more importantly, when you look at what the Fed is actually saying … well they’re saying the economy is really bad and there’s not much they’re going to do about it. Krugman wants to see QE3 not because he’s sure it will work, but because the Fed should be doing something to juice the economy.

After Obama’s absentee press conference — and I’m referring to the time he was there, not the delay — and the Fed’s whiff this afternoon, it’s hard to see today’s market bounce as evidence of anything other than the market’s volatility, not enthusiasm. What’s worse is that the only actual economic data point from today … wait for it … was another bad one. Non-farm productivity dropped .3%, and after the Bureau of Labor Statistics revised last quarter down 2.4% — from 1.8% to -.6% — that gives us two consecutive quarters of negative productivity, which hasn’t happened since the last half of 2008. So the only actual number of the day is extremely negative, yet the stock market soared to near-record gains. It’s getting easier to understand how these people blew up the world economy more and more every day.

The disconnect between the elite policy makers and the public is hard to overstate. The disconnect between the establishment media and the public is equally hard to overstate. We’re living in a country crippled by self-inflicted austerity madness, limping towards what the gallows dwellers are referring to as a recovery-less recovery at best, and a Lesser Depression at maybe worst. So don’t ignore the screaming headlines about the DJIA, but when someone or something shows you it is in a state of panic-induced frenzy, do them the respect of believing them and stick to the underlying trends.