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NOLTE NOTES The equity market has, over the decades, been called many things – among them manic-depressive. If you’re unsure of a good working definition, just check out the activity at the end of the week. On Thursday the trade deficit and retail sales figures were released that indicated we imported much more than exported, which will cause a severe revision lower to our economic growth estimates in the first quarter. Retailers had a particularly tough time in April, whether due to the weather or the impact to the floating Easter holiday. Stock promptly sold off, as the Dow declined by nearly 150 points. Come Friday, the producer price report indicated a moderating inflation (after stripping out the non-essential food and energy!) environment that could allow the Fed to cut interest rates – and the Dow rose 110 points. So which is it – a near recession or low interest rates and more importantly are they necessarily good for the economy? The Fed did meet last week and essential said the same thing as their prior meeting – still keeping an eye on things, but nothing much has changed to warrant a shift in interest rates. And although the retail sales were poor, a couple more data points would be nice to help determine if the consumer has finally stopped shopping – an assumption everyone has been making (incorrectly) for much of this decade. The market’s dependency upon each data point will keep investors on their toes. The big moves at the end of the week also gave us a way to check overall sentiment using volume and net advance/decline figures. What emerges is little difference from what we have been seeing for the past few weeks – poorer numbers on advances. While the NYSE net advance/decline figures were nearly exact mirrors of each other, the OTC was decidedly more negative. Volume declined from the rather anemic readings on Thursday and the new high list was also a bit smaller. The weekly readings of many of our indicators (longer-term look) showed modest deterioration even though the NYSE was up. The market momentum remains higher though it does show signs of weakening. Unfortunately we will have to wait until after the fact until we are able to say with some certainty that a top has finally arrived. Best guess is that we have a couple more percent for the markets to rise before a correction is at hand. However, given the action of late last week, we may have already seen the correction (with a 150 point decline) and we are well on our way to ever-higher levels. While warning signs abound, the real indicator of a correction – prices actually falling – has yet to visit the corner of Broad and Wall. The bond market continues to point to ever lower interest rates, as the model remains firmly in the “buy” range at a four. All the talk of inflation and a quickening economy with a Fed that will have to raise rates later in the year to stem the inflationary cycle doesn’t currently wash with the indicators we are seeing. Even the CRB index is struggling to reach new high ground. In fact, the commodity index remains about the same level as early December. Oil prices too are about the same level as last August (I know, not at the pump!). As a result, we don’t expect inflation to be an issue for income investors over the coming year and should lock in rates as the Fed embarks on a rate cutting cycle later this year.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.
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