28 Feb 2003 Noise or Information?
The information age in all of its glory is alive and well in spite of, perhaps even because of, our current economic and political malaise. During the 1991 war with Iraq, CNN benefited handsomely as the pioneer 24-hour cable news network. As we again prepare for war withIraq, some six 24-hour national news networks crowd the viewer’s choices along with a myriad of newspapers, websites, and internet news services. We can now watch and listen to reporters in every newsworthy (or what their producers deem newsworthy) corner of the world, on demand.
The choices for news and views of world commerce have also grown dramatically since the days of Louis Rukeyser’s Wall Street Week. Now viewers can access as many opinions about where the economy, or stocks, or gold, or the dollar are going in the next six hours or the next year. CNBC, Bloomberg News, Reuters, CNN Money, The Wall Street Journal Online, Yahoo Financial, national newspapers and dozens more sites devoted only to financial news and opinions are now available.
People who didn’t know what a computer or the Internet were two years ago are now adept at instant messaging, email, chat rooms, global Internet search engines, and the likes. Information is available any time and in most any form at our beck and call.
One problem with all this information is that it tends to fuel the dominant trend. Back when the Internet Bubble was in full swing, the “information highway” came into its own. Online trading grew faster than any other business in recent memory. General Electric, and others, built investment capital websites devoted to matching entrepreneurs and their business plans with interested investors and their capital; seemingly eliminating the need for investment bankers. Dentists and engineers quit their day jobs to trade stocks full time. Money flowed into the market at Internet speed.
Today, one could argue the reverse is true. Just as we were infatuated with endless optimistic possibilities of the Information Revolution in 1997, 98, and 99 we now seem to be confounded by pessimism and doubt. A lightening rod for that pessimism has become the looming war withIraq. It dominates thought and planning at every level – from consumers, to business leaders, to world leaders. BeforeIraqI in 1990 there were only a handful of talking heads opining the possible catastrophic affects of a war with the ‘brilliant war strategist’ Saddam Hussein and the world’s fifth largest army. Today, it is almost impossible to escape the discussions, debates, protests, and analyses of the likely war. We are perhaps busier gathering information than processing it.
Because of its potential to change the dynamics of the global economy, investors have given little credence to anything else. The Dow Jones Industrials are down five percent since the first of the year. The NASDAQ is down 4.5%. Aside from consumer confidence, which has declined since war talk began in May, other economic indicators have mostly held steady or improved.
Yesterday stocks climbed as the Commerce Department reported that orders for autos, business equipment and other durable goods rebounded more than expected in January. Orders increased 3.3%, and economists surveyed by Bloomberg had an average forecast of 1% growth. Stocks were also boosted as the Justice Department lowered the nation’s terror alert level to “elevated” from “high” after three weeks.
Today, the Commerce Department announced that theU.S.economy grew at a 1.4% annual rate in the fourth quarter, twice faster than reported a month ago, as companies added to inventories at a quicker rate, as reported by Bloomberg. Economists had forecast a 1% rate of increase in gross domestic product, based on the median of 65 forecasts in a Bloomberg News survey. Consumer and business spending were also stronger than previously reported. Our economic growth would have been stronger if our exports had not been so weak; a sign the world’s economies are suffering worse than ours. The record fourth-quarter trade gap subtracted 1.42 percentage points from growth during the three months.
Business fixed investment – a critical component for growth in this economy, which includes spending on commercial construction as well as equipment and software, rose at a 4.5% annual rate in the fourth quarter. It was led by a 6.6% increase in spending on equipment and software, more than the previously reported 5% increase. Companies added inventories at a $24.7 billion annual rate in the fourth quarter compared with last month’s estimate of a $3.3 billion pace of increase.
Inflation is muted. The GDP price deflator, a gauge of inflation tied to the report rose at a 1.6% rate. It was the fifth straight quarter that the gauge was below 2% at an annual rate, but it is still growth. Adjusted for inflation, GDP totaled $9.52 trillion in the fourth quarter when measured at an annual rate. In the third quarter, GDP totaled $9.486 trillion at an annual rate.
The economy is growing, but consumer perceptions of the future are worsening. The decline is largely due to the war, which is why its successful conclusion is vital to the near term health of the economy. The Conference Board’s consumer confidence index fell to 64 this month from a revised 78.8 in January, the New York-based group said. Except for a 17-point drop the month of the terrorist attacks, this month’s 14.8-point decline was the largest since April 1980, when aU.S.mission to rescue American hostages in Iran failed.
Large drops in consumer confidence have usually been followed by large increases in stock prices in the following year. In a recent newsletter, Don Hays reports a study by John Wilson at Morgan Keegan that demonstrates how markets respond to significant drops in confidence in the following 12 months.
Five Biggest Drops in the Consumer Confidence Index
DATE DROP EVENT S&P 500 12 Months Later#
Apr. 1980 20.3 points Failed Iran Hostage Rescue 25.0 %
Aug. 1990 17.0 points Iraq InvadesKuwait 18.9 %
Oct. 1990 23.0 points U.S.plans for war in Gulf 29.1 %
Sep. 2001 17.0 points Sept. 11 Terror Attacks* (21.7 %)
Feb. 2003 14.8 points U.S.plans for war in Gulf
*S&P 500 had a 24.6 % rally in the four months following the attacks.
It is difficult to see beyond the looming conflict with Iraq and all the potential risks it carries. But as the table above demonstrates, things were not as bad as they seemed at the time. While there are more views available in the public domain than at any time in our history, perspective is more important than ever. Over the long run, the stock market has returned 12% annually. Faith in theU.S.economy has been rewarded with handsome long term returns. In spite of the numerous short-term opinions to the contrary, that belief is still valid. Better times are ahead. Take a break from the news and have a good weekend.