Dollars and Sense: Is Wall Street whistling past the graveyard?
Another bull run or dead-cat bounce? It’s hard to believe, given the economic news and the recent stock market correction, but we’ve experienced a bit of a rally on Wall Street in the past couple of weeks. The markets rose every day last week. The Dow clawed its way back over 17,000. That’s 1,300 points higher than the low point of the correction. You can still hear some analysts saying this bump is a “dead cat bounce” and the markets will head back down. But I would say the consensus among analysts is that we have entered a period you might call a new normal: low interest rates and slow growth.
Is the new normal good? In my opinion, no. I am not as critical of the Federal Reserve Bank as some of the most conservative analysts who believe the Fed should be abolished. I tend to think that’s an impossibility. There is virtually no political will in this country for such a move. I think we should audit the Fed, not abolish it. The real danger is our $18 trillion national debt. That number is so large because the federal government has infiltrated itself into just about every area of our lives, and when the government runs anything, it becomes less efficient. With Obamacare now in the final stages of implementation, we can say about 20 percent of our economy has a direct tie to government funding, and that means government control. No business person with an aggressive entrepreneurial spirit thinks that’s a good situation.
Fed effects. And speaking of the Fed, last week’s rally is really a direct response to the Federal Reserve—or at least a response to what the markets think the Fed will do. A weak jobs report last month signaled to the markets the economy might not be strong enough for a rate hike, and that caused stocks to claw back some of the past few weeks’ declines. That conclusion was reinforced on Thursday when the Fed released the minutes of last month’s meeting, revealing the Fed is still worried about low inflation. Analysts took that to mean we would not see an interest rate hike soon, sending stocks higher. Wall Street was also emboldened by signs the Fed decision to hold off on rate hikes was not as close a call as originally feared, another sign hikes might not come until next year.
Oil stabilizes, sort of. The energy sector also contributed to last week’s rally. Oil prices fell below $40 a barrel in August, but in recent weeks they have rallied a bit, up to almost $50 a barrel. That’s not anywhere near the $100 a barrel of a year or two ago, but it is at least above production costs for a lot of U.S. companies.
Earnings season returns. Alcoa got things rolling Thursday with a not-so-great report. It missed earnings by a wide margin, but—as you may remember—what has been troubling about corporate reports over the past few quarters is that they keep revising downward their future guidance. But Alcoa’s report suggested the worst of the downward pressure on commodities may be over. Again, that new normal of slow growth. Steady, predictable growth creates an environment in which companies can make money. But we’ll need to see some strong earnings reports this quarter to sustain stock prices at current levels—Federal Reserve manipulation or not.
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