By Sy Harding, Street Smart Report
The economic news this week was mixed.
On the negative side, too many companies either reported disappointing September quarter earnings, or warned they would fall short of Wall Street's forecasts for the current quarter. Most blamed inflation for taking a bite out of earnings or declining consumer confidence for taking a bite out of sales.
The Conference Board reported its 'Leading Economic Indicators' fell 0.7% in September, the third down month in a row, indicating slowing economic growth for at least the rest of the year.
The most discouraging report was the Producer Price Index, showing inflation at the producer level rose 1.9% in September, an annualized rate of a scary 22.8%, the largest monthly increase since the runaway inflation years of the 1970s.
On the bright side, crude oil prices plunged to a three month low of $60 barrel. The housing market remained strong, with new housing starts rising 2% in September (although the median price of homes declined).
The Federal Reserve released its 'Beige Book' report, in which the regional Fed governors reported the economy remained firm in their regions in spite of the effects of the hurricanes. The Philadelphia Fed reported its business index, often a bellwether for the nation as a whole, rose to 17.3 in early October from just 2.2 in September (readings over zero indicate economic growth).
On Thursday the Labor Department reported first-time filings for unemployment benefits fell by 35,000 the previous week.
So there were an encouraging number of positives indicating the economy is still holding up in the face of rising inflation, rising interest rates, and declining consumer confidence. And there was at least some relief on the inflation front from the decline in oil and gasoline prices.
However, whether that will be enough to spark a sustainable market rally just yet is questionable. The stronger economic reports may actually be a problem for the market. Weaker numbers might have raised hopes again that the Fed would stop raising interest rates. However, the stronger economic numbers, coupled with the big rise in the producer inflation numbers, guarantee the Federal Reserve will continue to raise rates, and may even become more aggressive in doing so.
The bad news on that score is that the stock market just does not like rising interest rates. Not only do they raise costs for businesses, and make it more difficult for consumers to finance purchases, but they raise the interest rates that investors can earn elsewhere, providing competition for the stock market.
On that point, it's interesting to note that since the Fed began raising interest rates in June, 2004 the stock market has gone absolutely nowhere on a buy and hold basis. On June 30, 2004 the Dow closed at 10,435, the S&P 500 closed at 1140, and the Nasdaq closed at 2047. Interest on cash in a money market fund has outperformed the market since then.
For a few months this summer the market tried to rally on hopes that the Fed would soon be satisfied it had fought the good fight against inflation and would call a halt to the rate hikes. The Katrina hurricane disaster boosted those hopes further by creating concern that its aftermath might have a devastating effect on the economy. Investors hoped the Fed would care more about the economy than inflation.
But the Fed soon disabused investors of that notion when it raised rates again at its September meeting. That made for eleven rate hikes in a row since June of 2004. Its next meeting is on November 1. Will it hike rates again? After all, crude oil and gasoline prices have come down in recent weeks. That must relieve some of the Fed's inflation concerns.
Not really. The Fed was concerned about inflation long before the hurricanes came along. And the fact that oil has dropped back to its pre-Katrina level of $60, is not much consolation. It is still considerably higher than its $40 level in June of last year when the Fed began hiking rates.
In fact, probably the most important events this week for the market were the public appearances by several Fed Governors, and even Fed Chairman Greenspan, delivering the clear message that the Fed will continue to raise rates over at least the next several FOMC meetings.
Editor's Note: Sy Harding is president of Asset Management Research Corp., 505 East New York Ave., Suite 2, DeLand, FL 32724, publisher of The Street Smart Report, 1 year, 17 issues, $250 (now in its 18th year of exceptional market research for professionals and serious investors) and The Street Smart Report Online at www.StreetSmartReport.com, 1 year, $225. Timer Digest has consistently ranked Mr. Harding in the Top Ten Timers for Stock Market Timer, Gold Timer and Bond Timer since 1990. In his 1999 book, Riding the Bear - How to Prosper in the Coming Bear Market, Sy Harding outlined a simple strategy that works in bull and bear markets. Mr. Harding's Seasonal Timing Strategy (STS), continues to significantly beat the Dow and S&P 500, doing so over the last one-year, two-year, three-year, and five-year periods, and back-tested for the last 10, 20, 35 and 50 year periods. It did so with its normal two trades a year, using just an index fund, and did so with half the risk of buy and hold investing, as the strategy is in cash between 4 and 8 months every year. Visit www.StreetSmartReport.com for FREE stock market commentary and a Special Trial Offer.
