08 Apr 2011 Fed Says Economy’s Gaining Traction
Stocks continue to rise in the face of 30-month highs for oil. Gold hits a new record at 1,468.90 and Treasuries are declining. Bulls find new reasons to buy each day, despite the challenges of Japan, the Middle East, and European member states, and rising commodity prices to name but a few.
It was a light week for new data on the economy so let’s start today’s Brief with a little exercise. Remember back to March 6, 2009, the stock market’s low following the 2008 financial meltdown. With perfect knowledge of the last 25 months you are given the opportunity to put all of your money into one of five index baskets represented by the following indexes and ETFs: S&P Energy, iShares COMEX Gold, iShares Treasury Bond 7-10 Year, Vanguard FTSE All World, and Vanguard Total US Market. And just for fun, rank each of them 1 to 5, with 1 being the best performer and so on. Once you’ve made your selections, check them at the end of today’s Brief.
How did you do? There’s more than one surprise in the results. First, gold does not shine as brightly as recent headlines give it credit, though longer term it has been a stellar performer. Oil has tracked relatively close to stocks as measured by the total US index and the FTSE World index. It follows that as economies grow, their demand for oil grows coincidentally. Finally, 7-10 year Treasuries haven’t done so badly as they are up 5%, not counting the roughly 7% additional interest earned over the two-year period translating to an annual total return of 6% for the index. The point of the comparison is to demonstrate how sensational headlines can impact our thinking and our expectations. And if emotions enter your investment decisions, odds of a good outcome decline significantly.
Economists, particularly those on the Federal Open Market Committee, try to minimize the sensational elements when making policy decisions. Minutes from their last meeting (three weeks ago) revealed that most members see higher commodity prices as having only a transitory effect on inflation and that expectations for inflation appear to be stable for now. But they do note that inflation expectations have taken on a bigger role in their debate. Here’s what they had to say on the subject of inflation:
“The staff revised up its projection for consumer price inflation in the near term, largely because of the recent increases in the prices of energy and food. However, in light of the projected persistence of slack in labor and product markets and the anticipated stability in long-term inflation expectations, the increase in inflation was expected to be mostly transitory if oil and other commodity prices did not rise significantly further. As a result, the forecast for consumer price inflation over the medium run was little changed relative to that prepared for the January meeting.”
They see the recovery holding its own, but they note the increased risks from higher commodity prices, turmoil in North Africa, and the Middle East, and the problems in Japan. They said “the pace of economic activity appeared to have been a little slower around the turn of the year than the staff had anticipated at the time of the January FOMC meeting, and the near-term forecast for growth of real gross domestic product (GDP) was revised down modestly . . . real GDP was expected to rise at a moderate pace over 2011 and 2012, supported by accommodative monetary policy, increasing credit availability, and greater household and business confidence. Reflecting the recent labor market data, the projection for the unemployment rate was lower throughout the forecast period than in the staff’s January forecast, but the jobless rate was still expected to decline slowly and to remain elevated at the end of 2012.”
Have a good weekend