DJIA Plunges 7.9% in May

The DJIA (Dow Jones Industrial Average) plunged 7.9% in May, it’s largest monthly decline in over a year. The S&P 500 fell by an even greater amount in May, 8.2%. This is the worst May decline for the S&P 500 since 1962.

Stock prices are being depressed due to concerns over federal government debt and regulatory overreach. Federal government debt takes money out of the productive economy, making it more difficult for businesses to create and sell goods and services. Regulatory overreach raises the costs of doing business in the United States, making American businesses less competitive internationally.

Fears of the eventual consequences of unreasonably low interest rates and the $1.4 trillion dollars in low-quality real estate debt held by the Fed also contributed to depression worries and push stock prices down. The fed uses low interest rates to give a temporary boost to the economy, like a shot of Red Bull. This boost must eventually be paid back in terms of inflation, losses on inefficient investments, and default on bad debts. The Fed is currently holding onto $1.4T in low-quality mortgage debt, but must eventually release those mortgages back into the open market. When they do this, the spiraling fall of real estate values will accelerate significantly.

In addition, there is concern that the global economy could be damaged by the costs of bailing out the socialist regimes in nations like Greece and Spain. The ratings firm Fitch downgraded the Spain’s sovereign debt twice in May, raising concerns of a default. Due to international agreements guaranteeing sovereign debt, mostly setup by the EU (European Union) and IMF (International Monetary Fund), a sovereign default in just one nation could start a domino effect which would lead to a wave of sovereign defaults across the Western world.

Cautious investors are exiting the stock market and holding large portions of their portfolios in cash. A flight to safety away from the Euro has buoyed the value of the U.S. Dollar, but this trend is unsustainable due to the Fed’s monetary policies.