MAY 6, 2008
MAY 2008 COMMENTS - THE CHECK IS IN THE MAIL
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Stimulus checks are on the way to beleaguered consumers and just in time. The economy should receive a bump in the second quarter as a result, but it is unclear whether this fiscal package will be enough to keep the economy in a positive growth mode. Payrolls on a rolling six-month basis just went negative, a sign that has consistently occurred in every recession over the past 40 years. Gross Domestic Product was slightly positive in the first quarter and it is an even bet whether we will see a positive number in the second quarter, notwithstanding the stimulus. Noteworthy is that the service sector experienced slight growth in April which indicates that perhaps the downturn will be milder than many think. We have opined here that the economy would likely be weak through year-end and we are still of that view.
STOCK MARKET REALLY - BEAR TRAP OR NEW BULL MARKET
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Equity markets have rallied sharply from the day the Bear Stearns bailout was announced with the Dow up around ten percent off of the low. This has raised the question in strategists' minds whether this is a rally in a bear market or the beginning of a new bull market. We have written about the leading nature of equity prices discounting changes in earnings and the economy. With an expected firming in the economy in 2009, one could make a case for a turn in market sentiment somewhere in this timeframe, although we do not believe that a major up-trend is imminent. Stimulus checks will help the economy over the short-run but their impact will be brief and the leveraged state of consumers will likely give the market pause in 2008 before a true recovery is believed by market participants.
INFLATION TRENDS BEAR WATCHING
- The Federal Reserve has been busy bolstering the United States economy via lower rates, higher liquidity and other moves that have the potential to be inflationary once growth resumes. In addition, the weaker dollar has raised the prices of many imports to the US as well as increased the price of many commodities. We are monitoring this trend closely for any future potential portfolio impact.
THIS MONTH'S FOCUS - MIXED DATA FOR APRIL, BOND MARK CONUNDRUM, AND INCREASING BUDGET DEFICIT
- The mixed market data for April reflect strong performance in equities and a stable dollar versus the Euro. On the other hand, interest rates, except for the fed funds rate, are higher. The price changes for oil and gold diverged this month-oil was up and gold was down; however, both oil and gold reached new all-time highs recently: $119.93 for oil on 4/28 and $1,032.70 for gold on 3/17. Finally, total employment was down "only" 20,000 for the latest month, but the total decline since the peak in December, 2007 has been 260,000 jobs.
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The new bond market conundrum is why are bond prices falling, and yields rising (as noted in the table above) if:
- Energy prices are up, thus slowing the economy;
- Interest rates are up, an apparent negative for housing; and,
- Employment is down?
|
4/30/08 |
03/31/08 |
Change 4/30/08 vs. 03/31/08 |
Dow Jones |
12,820.10 |
12,262.90 |
+ 4.54% |
S&P |
1,385.59 |
1,322.70 |
+ 4.75% |
Fed Funds |
2.00% |
2.25% |
- 25 basis points |
5-yr. Treasury Yield |
3.01% |
2.43% |
+ 57 basis points |
30-yr. Fixed-rate Mortgage |
6.03% |
5.85% |
+ 18 basis points |
2-30 yr. Treasury Yield Curve |
221.0 b.p. |
270.0 b.p. |
- 49 basis points |
Euro in $ |
$1.5622 |
$1.5788 |
+ $0.0166 |
Oil |
$113.46 |
$101.58 |
+ $11.88 |
Gold |
$877.55 |
$931.05 |
- $53.50 |
Total non-farm payrolls |
137,818,000 |
137,838,000 |
- 20,000 |
The quick response to this question is that "fear of inflation" is causing yields to rise. Given declining employment and falling home prices, only time will tell if these inflation fears and higher rates are justified.
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An increasing budget deficit in the area of $400-$500 billion is now projected for the 2008 Fiscal Year (FY) ending 9/30/08. This sharp increase from the $163 billion deficit for FY 2007 is due to the stimulus package and higher defense expenditures. To put these numbers in perspective, the record deficit was $412 billion in FY 2004, and the largest surplus was $237 billion in FY 2000. The good news is that the size of the deficit appears to have little or no impact on rates-as long as Foreign Central Banks continue to be aggressive buyers of our securities.