Investors see mixed signals for economy
It seemed like every positive announcement had a negative side to it last week. As a result, the markets wallowed aimlessly as investors tried to figure out what’s going on and where the economy stands.
By week’s end, everyone was as confused as ever.
Fourth quarter growth
The first cheering report was an initial indication from Washington that the U.S. economy actually grew in the fourth quarter of 2001. Not by much, mind you. The initial estimate is 0.2 per cent.
But when everyone was expecting a third straight quarter of decline, that was buoyant news.
The dark side is that, even if that figure holds up (initial estimates are always revised later), a 0.2 per cent growth rate isn’t going to take us very far, very fast.
Then we had some upbeat figures on improving consumer confidence in the U.S. from the University of Michigan and the Conference Board. That’s encouraging. But some sceptics pointed out that the confidence level is fragile and there are signs consumers are stretched to the limit in debt terms.
That means that a surge in demand to fuel an economic recovery is unlikely.
At week’s end came the news that the U.S. unemployment rate was down to 5.6 per cent. That again looks good on the surface.
However, the Labor Department threw cold water on any optimism by noting that almost one million people dropped out of the work force because they couldn’t find employment.
Next page: No interest rate cut
No interest rate cut
But the week’s most important development was the decision of the U.S. Federal Reserve Board to bypass another interest rate cut at their January meeting. That’s the first time in a year the Fed hasn’t lowered rates at a meeting.
The wording of their announcement didn’t amount to an unqualified vote of confidence in the state of the U.S. economy, however.
There was a warning that going forward, there is still a tilt towards weakness. As a result, the Fed retained its bias towards easing.
That’s why the reaction of the stock markets was mixed. Initially, they responded positively, interpreting the stand-pat position as a sign the turnaround has arrived.
But the enthusiasm had dissipated by week’s end. The Nasdaq Composite ended the week down 1.4 per cent and the S&P 500 lost about 1 per cent. The Dow managed a fractional gain of 0.7 per cent.
Here at home, the TSE 300 finished the week with a modest 0.4 per cent advance, but almost all the strength came from the smaller companies in the index. The S&P/TSE 60, which represents the blue-chip side of the index, barely broke even in the five trading sessions.
Hardly a great vote of confidence.
Consider these dangers:
While investors continue to be buffeted with conflicting views of the future, some significant risks remain. Consider these dangers:
- Another major attack.
News reports in the U.S. this past week headlined stories about possible imminent threats to everything from nuclear power plants to Seattle’s Space Needle. Al Qaeda and its supporters may be in disarray, but they haven’t gone away.
- President Bush’s harsh tone towards Iraq, Iran and North Korea in his State of the Union message.
The President seems to be feeling his oats as a result of the success in Afghanistan. But a military campaign against any of the countries he named would be on a much larger scale than anything we have seen so far and would risk drawing in other nations. (China might feel obliged to act on behalf of North Korea, for example).
Bush is enjoying a huge popularity surge. But if he doesn’t tread carefully, he risks plunging the U.S. into the kind of economic, military, and social quagmire that tore the nation apart in the 1960s.
- A stock market buying frenzy.
With all the cash sitting on the sidelines, there is a danger that investors will suddenly decide the time has come to jump aboard before the train gains momentum. This would drive stock prices to levels inconsistent with corporate earnings and future prospects.
The result could be another bubble such as we saw in the late ’90s. That would not be healthy for anyone. Steady growth combined with a gradual market climb is what is needed.
Stick to long term
In the midst of all this uncertainty, the best advice we can offer is to make a long-term plan and stick to it.
Buy quality securities at reasonable prices and be prepared to ride out the volatility that is likely to persist for some time. In short, be committed to your program.
From the Feb. 4 issue of the Internet Wealth Builder.