CURRENT MARKET OUTLOOK
-08/25/08 next update Tuesday 09/02/08-
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Probability of Federal Reserve increasing interest rates by 09/16 FOMC meeting
by 1/4%: 4%
by 1/2%: 2%
(click to see graph)
Past Statements:
03/15/04- [Our view is that now is not the time to let terrorism scare stock investor's from holding their positions in the market. We believe that government intervention from the Federal Reserve is ready if needed, which significantly moderates the downside risk. Despite some media assertions to the contrary, our calculations according to the Federal Reserve's methodology does not show prices being to high. One must remember that market pullbacks are customary and the current 5% downturn is very common. Downturns up to a magnitude of 10% happen on average three times a year no matter what the named cause.] Still valid for 2008
06/19/06- [Despite the current angst regarding future rate action, we believe there is a good chance that the Federal Reserve will be ending its campaign of rate increases. We view this as becoming positive for the stock market later this summer, since it will remove the question of how high rates will rise to slow the economy to a level of inflation friendly growth. This will put the Fed Funds Rate just above the historically "neutral" 3.5%-5.0% range. The Federal Reserve wants interest rates at a level that will keep "core" inflation between 1%-2%.]
10/16/06- [With regard to the important housing sector of the economy, we still do not expect the present weakness to become severe enough to cause a recession to develop, because interest rates have remained low enough to be supportive. Any data suggesting that the weakness is bottoming out will help current market sentiment. The latest thinking is that we will have to wait until late next year (now 2008) before the data starts to show an improving housing market.] Still valid for 2008
01/21/08- The Federal Reserve Valuation Model (see above link) is now more than 50% below fair value. This is the lowest we have seen it over the past 21 years. The last time there was such an extreme valuation was when it was showing the stock market being above fair value back before the 3-year decline that started in 2000 when the "tech bubble" burst. This present valuation when considered with present Fed. action and governmental legislative action is very positive for a the likeliness of a stock market recovery. This is particularly true, since unlike the 2000-2002 decline, stock values have fallen from a "low" valuation level instead of a "high" valuation level. Despite the negative commentary one hears from the too often hysterical media pundits, our analysis indicates this to be a poor time to be selling stocks. A recovery in prices will inevitably abruptly come and likely much sooner than occurred last time.
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The strong stock market on Friday erased most of the week's decline, as reflected in the -31.84 Dow, -6.00 S&P500, and -37.81 Nasdaq index point changes. The long-term treasury yield rose slightly +0.02 to 3.87%. Federal Reserve Chairman Ben Bernanke stated in a speech at Jackson Hole Wyoming that he expects inflation to moderate going forward. This helped sentiment after the Wholesale Prices report showed a higher than expected 1.2% increase for July. The July Consumer Price Index shows yearly inflation is higher than desired at +5.6%, but Unit Labor Costs are up a more inflation friendly 1.3% for the 2nd quarter. This week will bring a revised Gross Domestic Product report for the 2nd quarter that is expected to raise the initial +1.9% estimate by almost a full percentage point.
In the (07/14/08) Market Outlook we stated that the stock market was 20% lower than at the market's peak last October, and at a level that provides exceptional value when considering the long-term history of price movements. We pay particular attention to the Federal Reserve Valuation model in setting stock allocations (see Federal Reserve Valuation link at the top of this page). The current 52% at that time (now 50% on 08/22/08) undervaluation reading indicates both a large potential for higher prices in the future and an increasingly smaller chance for further declines. Any improvement in the outlook, particularly for energy prices, will be well received by the markets.
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Earlier this month, Treasury Secretary Henry Paulson said he expects the economy to be able to sustain "moderate" growth for the rest of the year and that the housing market should stabilize after several more months of weakness. Last month, Federal Reserve Chairman Ben Bernanke testified before House and Senate committees that the economic difficulties would continue, suggesting that the Fed. will be holding interest rates steady at least for the remainder of the year to help economic growth recover. The Federal Reserve will continue to monitor inflation pressures, but presently feels that economic risks and inflation risks are now closely balanced. July's inflation reports shows Consumer Prices rising 5.6% over the last twelve months and Producer Prices increased 1.2% in July. Since the Federal Reserve thinks that inflation will be moderating in the near future, the present outlook is for interest rates to remain unchanged at their relatively low level for the time being in order to help the economy through the present difficulties.
The August Federal Reserve's Open Market Committee meeting decided to hold interest rates at their present levels. At its June meeting, the Federal Reserve cut interest rates by 0.25%, which they believe will eventually be enough to get the economy's growth back to an acceptable level. Despite some difference of opinion, we do not expect the Federal Reserve to raise interest rates later this year, since the specific causes of most of the inflation has been in food and energy due to events which are occurring outside of the areas that can be controlled by interest rate policy manipulation. We think that the Federal Reserve will continue to hold interest rates low until stronger economic growth resumes. The current weakness in job creation and slow economic growth plus housing weakness will keep the Fed. on hold until the data on these areas improve.
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The revised 2.7% estimate of 2nd quarter growth was better than initially projected. Stronger exports vs. imports accounted for most of the improvement. 1st quarter 2008 growth was an anemic +1.0%. The final 2007 estimate of 4th quarter growth was revised to show contraction at -0.6%. 2007 3rd quarter Gross Domestic Product was a strong +4.9% gain that is above the level the Federal Reserve wants in the +2.5%-+3.5% range. 2nd quarter 2007 Gross Domestic Product was a very healthy +3.8% bouncing back from the weak +0.7% growth of the 2007 1st quarter. The most recent June 2008 inflation report showed Core Personal Consumption Expenditures were up for the month +0.3% (1.2% annualized). The Federal Reserve's annual target range is for price increases to be between 1.0%-2.0%.
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International issues are certain to remain in the headlines, but our view is that the markets will continue to focus attention on business matters, namely the state of our economy. The stock market responds positively when economic data shows a healthy rate of growth with contained inflation and moderating energy costs.
During this week, a large number of important economic data reports will influence the markets: [those with the most market moving potential highlighted] Monday- Existing Home Sales; Tuesday- Consumer Confidence, New Home Sales, Fedaral Open Market Committee Minutes; Wednesday- Durable Goods Orders, EIA Petroleum Status report; Thursday- Gross Domestic Product, Jobless Claims; Friday- Personal Income/Outlays, National Assoc. of Purchasing Managers-Chicago, Consumer Sentiment.
Our technical system's score for the market's fundamentals stands at +6 (range 0 to +10), which is in the "positive" range for the future. (Please note that this technical score does not incorporate any of our measures for positive/negative market psychology, which is now "negative".) As always, the near-term direction of the market will be affected by the outlook for Federal Reserve action, the favorableness of economic data releases, earnings releases, analysts' forecast updates, and finally international events and governmental action.
Important Notice: The "Portfolio Detail and Activity" section of our website is updated on the day after any trading activity.
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