On the web since 1997
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On the web since 1997 |
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25 Basis Points Saves DayLuke Hodgens / Powerhouse Profits -- While most analysts predicted the 25 basis point rate hike this week, many, especially those in the bond market, were hoping for no change. With energy prices at all time highs and the red hot jobs market beginning to cool off, uninformed equity investors were hoping for a revision in the Fed's current monetary policy of measured rate increases - thank your lucky stars Greenspan stayed the course.Over the past year, investors were all too happy to see rates stay at 40 year lows. As stock prices go, when interest rates are low - stocks are up. Investors have feared a rising interest rate environment would eat into corporate profits and share prices. While this holds true under normal circumstances, yesterday's rate increase actually saved the day for stocks. Last week was simply horrible for the equities market. The Dow not only dipped below the psychological pain threshold of 10,000, it actually shed over 300 points, and the NASDAQ and S&P 500 were in the same boat. With the market down like this, intuition would tell you that if the Fed kept interest rates the same, stocks would rally. But, dear reader, intuition does little for investors. Because the jobs market is slowing and politically motivated "economists" are preaching the death of the expansion, the slightest hint of distress by the Fed would cause a monumental sell off in stocks, a huge rally in gold and bonds and a collapse of the dollar. The current bear market wanted badly to hear the words "no change in rates". Those four words would send investors running for the hills believing the economy was poor--but, in fact, the economy is robust. Greenspan's statement this week was almost identical to the June statement. While he did state that "in recent months, output growth has moderated and the pace of improvement in labor market conditions has slowed," he was quite optimistic about future growth. The softness in recent growth is a function of rising energy prices cutting into corporate and individual spending. "The economy nevertheless appears poised to resume a strong pace of expansion." After his statements, futures contracts pointed to a 70% chance of another rate increase in September. This too should be viewed as good news for stocks. Energy prices should soon moderate taking pressure off of future personal spending. While it's unlikely we'll see $30 per barrel for oil, Americans will adjust to higher prices as the shock factor wears off. Our economy is growing 10 fold compared to Europe and our unemployment rate is half that of theirs. 94.5% of Americans have jobs - not too shabby! For some reason that I cannot understand, the euro currency still has value. I'll get into that subject in a future column. Luke Hodgens is the editor of |
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