Financial markets continue to grapple with risk around the
world. The Iraq war has been successfully concluded, but now we
have to solve the problems associated with nation building. Oil
prices peaked in early March at about $38 a barrel and have now
dropped to about $26, but are still high enough to represent a
brake on global economic growth.
Financial markets continue to grapple with risk around the world.
The Iraq war has been successfully concluded, but now we have to solve the problems associated with nation building.
Oil prices peaked in early March at about $38 a barrel and have now dropped to about $26, but are still high enough to represent a brake on global economic growth.
We have, so far, avoided new terrorist attacks here in the U.S., but the threat (and expense) still hangs over us. Corporate scandals and accounting “restatements” have dwindled, but not ended.
Even the weather, which has generally improved over the eastern half of the country, is still dealing out major storms over the Midwest. Now we have to worry about SARS. I dislike this kind of “yes, but” environment.
While risks remain, I think risk levels are receding and the U.S. economy continues to gradually improve. GDP rose at a 1.6 percent rate in the first quarter, and I expect it will accelerate over the remainder of the year. Consumer spending is picking up again with chain store sales hitting a new high in early May.
New housing starts and sales picked back up again in March as the weather improved. Employment remains weak, with the unemployment rate rising back to six percent in April. A turnaround in employment is several months away, waiting for stronger profits and an end to company cost cutting.
Meanwhile, economic policy looks stimulative. Federal spending is up and taxes are down, with further tax cuts likely. The Federal Reserve is keeping interest rates down to fuel a rebound in investment. Neither I, nor the Fed, see an inflation threat.
The oil price driven up-tick in inflation will likely abate with oil prices down.
All this has contributed to a volatile recovery in equity markets since March 11. The Dow has risen about 14 percent (through May 7) and the NASDAQ is up about 18 percent. Meanwhile, high quality fixed income markets are cooling off, with interest rates at very low levels.
For example, the 10-year Treasury bond yield is 3.7 percent, up slightly from March 11, but near 42-year lows. Meanwhile corporate bonds have rallied along with stocks.
It looks to me that financial markets are starting to price in an improving outlook, but are still worried about the risks.
Be optimistic, and continue to watch the market and economic data for better direction. Staying diversified continues to be the best approach for these uncertain times.
Dan Newquist is a Registered Representative with Linsco/Private Ledger (Member SIPC). His office is in downtown Morgan Hill.
