Market Pulse: For every problem …
Stocks have been falling for most of August. Not by a lot and with very little trading, but the relentlessness of the selling makes the decline seem worse than it is (down 3.9 percent from high to low).
We’re told the reason is clear: interest rates are rising. Rising rates make for an easy headline. The media never mention that a little profit-taking after a 20-percent rally this year was understandable and in fact healthy.
They are also missing the real point — the economy.
The media expect a stronger economy, but recent economic reports tell a different story. New home sales tanked last month as mortgage rates rose.
Retail sales are disappointing and durable goods orders saw its biggest drop in nearly a year. The employment picture is the key to future growth. New job creations are mostly in low-paying, part-time work in retailing, hotels and restaurants with few full-time positions.
I am certain the Fed looks beneath the headline numbers and sees just how weak the jobs picture is. All this shows a weakening economy, not one about to accelerate. Even so…
The Fed still sees a second-half pickup to 3 percent GDP growth and 3.5 percent next year, but in their July meeting half the members began to question the official forecast.
If growth is much less (below 2 percent, as it is now), bonds would rally and rates would fall as investors realize that their optimism for the economy isn’t justified. How stock investors will take that remains to be seen.
So far, those who see the prospect of slow GDP (and therefore profit) growth are selling. I believe that for lack of a good alternative in fixed income or cash equivalents they’ll turn again to better-yielding stocks. My favorites include Spectra Energy (SE) and Chesapeake Energy (CHK).
There have been several sell-offs in this great bull market, most recently in May and June and before that last fall, but all were brief and followed by new highs.
Sell-offs in bull markets are usually fast and this one has been typical. In the past, the media were always ready with a reason (never just profit-taking).
The reason this time, they say, is that interest rates are rising. End of story
Wrong. The market is telling us that economic growth won’t pick up as much as the Fed expects. That’s the real story.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
Support Local Journalism
Support Local Journalism
Readers around Lake Tahoe, Truckee, and beyond make the Sierra Sun's work possible. Your financial contribution supports our efforts to deliver quality, locally relevant journalism.
Now more than ever, your support is critical to help us keep our community informed about the evolving coronavirus pandemic and the impact it is having locally. Every contribution, however large or small, will make a difference.
Your donation will help us continue to cover COVID-19 and our other vital local news.