Thursday, May 5, 2011

Reducing Momentum

It seems to me, that the economy and the stock market are like a giant pendulum swinging back and forth; first too far one way, and then too far in the other, with no real middle ground. Earlier this year, signs pointed to a rising economy that was moving much faster than most economists had predicted. The unemployment rate was sinking, the number of new jobless claims was trending down and new job growth was significant. Corporate earnings for the first three months of the year either met or beat the consensus expectations. On this news, the stock market began taking off in the later part of March and through most of April. As we enter early May, a reevaluation of where the economy is headed is taking place. Where the ideal for new unemployment claims was headed close to the magic 375,000 mark or below, which would indicate job growth, the recent four week average is now at 431,000, a jump of 21% in the past four weeks. The service sector that employs about 90% of the work force slowed for the second straight month. The current expectation for new jobs created has fallen from a week ago. All of this is beginning to drag the stock market down. The question in my mind is: Has the pendulum begun to swing in a negative direction or was the perception of how far it had gone in a positive direction overstated? I believe the case is the latter; that we are still on a positive course but one that corresponds more closely to some of the longer term projections made last year. We were bound to see dips along the way to a better economy. It would be wrong to think everything was suddenly going to be “all better.” The economy is coming out of the worst period since the great depression. Housing prices still do not appear to have bottomed out in many places. Commodity price increases got ahead of themselves. Speculators, who believed the world economy would grow at a fast rate, pushed commodity prices up, and are now seeing them collapse, as the world economy appears to be slowing down. Bear in mind that, at the tail end of last year, predictions were that unemployment would remain over 9% through the end of 2011 and would likely top 10% for a portion of the year. Unemployment is currently at 8.8%; not great but a whole lot better than expected. Perhaps the pendulum is slowing a bit, but it is also likely that stock market investors, commodity speculators and others just jumped the gun on how they interpreted the recent economy. Slow and easy seems to be working very nicely, thank you. The municipal bonds that no one wanted three months ago are desirable again, and inflation fears are subsiding, making corporate bonds and government bonds more stable. Now let’s see what we can do about oil prices! Ed Mallon