06 Jun 2003 Long Live the New Bull
In nine of the last ten trading days the S&P 500 index has increased. While two weeks is not a market trend, as the market is random in the short-term, it surely makes people feel better. On the anecdotal side, my conversations with clients, friends, and business associates have unanimously confirmed a growing optimism about the economy. Government statistics remain mixed, but are showing signs of improvement.
First let’s take a look at the negatives. This recovery continues to be a jobless one. Today, the government announced that the jobless rate increased to 6.1%, but that was largely expected. Even the bad news has some positive signs though as the payroll employment numbers declined less than expected, falling by 17,000 instead of an expected 30,000. Today’s report is the first with sweeping new job reclassifications designed to give greater emphasis to service industries that now comprise 85% of our economy. Manufacturing jobs didn’t fare as well as they declined by 53,000, greater than a expected reduction of 45,000, but not as bad as last month’s loss of 95,000 jobs.
The European Central Bank finally lowered its key financing rate by a half a percent yesterday, bringing European borrowing costs closer in line with those of theU.S.and removing some of the pressure that is driving the Euro up against the dollar. But the Euro continued to rise yesterday as traders believed that the Fed will likely lowerU.S.rates again in the face of continued economic weakness.
I believe Mr. Greenspan’s comments inBerlinearlier in the week regarding a potential reduction in U.S. rates were aimed squarely at the European central bankers who had previously been reluctant to lower rates in the face of weakening European economies. He in effect was jawboning them down to stem the tide of the falling dollar and to give himself a little more maneuvering room if he needs to reduce rates further. It likely explains why he was talking on both sides of the coin Tuesday when he said the U.S. economy is poised to accelerate in the second half of this year, but that the central bank had room to cut rates from a 41-year low if needed because inflation is under control.
Currency traders are likely missing the bigger picture. Both Japanese and European bankers seem to be waking up to the new reality that inflation is no longer a threat. If anything, deflationary pressures are the new reality and to fight it, bankers simply pump more money into their economies and money is the LIFE BLOOD of an economy. Greater liquidity means businesses grow and jobs are created – in short – growing economies.
Why the optimism? The war in Iraq has ended successfully. Peace in the Middle East has the greatest likelihood of success of any time in the last few centuries. Arab and Israeli leaders are making promises and concessions only dreamed of as recently as before the Iraqi war. Perhaps the greatest of those promises is that they will redouble (or begin in some cases) their efforts to stem the flow of money to terrorist groups. The removal of Saddam Hussein and his regime ended a money machine that funded resistance throughout the Arab world and seemed impervious to the west. That combined with recent bombings in Saudi Arabia have served to awaken Arab leaders to need for peace and cooperation for their very survival.
Other reasons for optimism are equally as compelling. The price of oil has fallen by nearly a third. Consumer confidence grew at the fastest pace in a year. Interest rates are at 40, 50, and 60-year lows. The Fed has said they will keep rates low, so investors and business leaders will begin to make investment decisions with greater confidence. We have witnessed the most simulative fiscal measures in decades with three tax cuts in as many years. Mr. Greenspan even got on board in support of the latest $330 billion tax cut when he said last week “Fortuitously, this particular cut in taxes is happening at the right time.” He had earlier been less supportive when the congress was considering Mr. Bush’s request, voicing legitimate concerns over the ability of Congress to restrain spending. It is my fervent hope that Mr. Bush can stand up to and defeat the likely coming Congressional spending bills and pork as effectively as he has so many other challenges. By doing so, he will go a long way toward sustaining this economic recovery.
Business activity is also gradually picking up. Now that the majority of corporate earnings have been reported for the first quarter, we can see an improving picture. According to First Call, corporate earnings beat analysts’ expectations by an average of 5.7%. Those results were significantly higher than the previous five quarters of reporting history.
In short, jobs remain the primary weak spot in this economy. The only way to reverse the trend is to get this economy growing again in the 3% or better range. ALL the pieces are in place and some the country’s smartest people are suggesting that it has already started.
What’s more, the best leading indicator, the market, is pounding the table with a growth message. Investors remain understandably gun-shy from three years of false starts and disappointments. But doubt and worry are actually healthy for the market. Those more skeptical investors selling into rallies help keep the lid on speculative excesses that develop when markets suddenly turn up with consistency.
Yes, this rally is for real, but don’t expect Internet speed as we had in the 90’s. We learned that the economic rules do still apply in the Information Age just as they did in the Industrial Age. But if we can use those rules to burst bubbles and dampen enthusiasm, can we not also rely on their immutability to support arguments that the economy is improving? Economics 101 tells us that the conditions for solid growth are firmly in place. Some of the world’s smartest people are telling us that the pieces are in place for growth. And finally, the statistics are telling the same story. The market believes the story. The new bull lives and is growing stronger