Retooling Balance Sheet

Consumers are in the process of adjusting their balance sheets.  Given the swoon we've seen in home prices and stock prices, we now know that the average consumer is down 20-40% this year alone.  To have that much lopped off of your bottom line is painful.  Your confidence is in crisis mode and you don't trust any asset class.  So what do you do?

You start saving.  And I mean saving cash.  You're not buying equities, real estate, or anything investable.  You're not buying anything because you're not in a rush to buy.  You worry about unemployment and about slowing GDP growth.  You are extra cautious.  You don't want more debt.  So you ramp up your savings account and raise your savings rate.

This in part will help us out of the recession, but will also delay the new day.  The bear market may not last as long as you think, but there also will not be a roaring bull market any time soon.  Volatility should remain somewhat high since we're in unchartered territory.  Stock indices will likely reflect little growth but individual stocks can show significant growth.  I see us teetering like this for as long as 2-3 years.

Bottom line - we're an enormously wealthy country blessed with one of the most stable governments and a robust financial system.  If consumers hunker down and start saving more, we'll be in a period of hibernation.  But, they will wake up one day.