The major US stock indices are within 2% of their highs for the year (and all-time highs for the Dow and S&P 500). In the past eight weeks they have gyrated from these levels to down 10%, then back up. This illustrates the speed of corrections and price movements in today’s electronic and global markets. It also illustrates the folly of market timing and why, unless you’re glued to your screen every day, you should invest for the long term and not try to outguess the market.
Over the next few weeks the markets may hit new highs, while moving in a choppy sideways pattern. The drivers will be the economy and earnings. The principal economic event to watch is new jobs creation. Secondarily, watch real wage growth and retail sales. These three indicators should begin to line up and tell us whether we’ve had a mid-cycle slowdown or are heading into a recession. Third quarter earnings results will be released during the latter half of October. These will give us an indication of the impact of the recent credit problems on corporate America as well as providing another clue as to the strength of the economy.
Two other areas to watch are housing/mortgage and energy. The subprime mortgage problem is both old news and contained. New housing starts are running at 1.3mm annually, a number which is getting a lot of press because it’s so low. That’s true if you compare it to the 2.2mm starts in 2005, but it’s around the long term average. New housing starts aren’t the problem. Adjustable rate mortgages tied to LIBOR, as I wrote about last week, are the problem. LIBOR, right now, is decoupled from US Treasury rates and is heading higher because of the strength of global economies. This will take dollars out of consumers pocketbooks. Energy prices are rising, oil is at record highs and there’s every reason to expect it to continue to climb, particularly because oil is priced in dollars. As the dollar weakens, and it’s at a record low against the Euro and the Pound, oil producing nations increase their price to maintain the real monetary value of their oil. With our trade deficit, there’s no reason to assume the dollar will reverse direction anytime soon.
Where does this leave us? Let’s return to our first point: we can’t time the market. So, don’t pull out money waiting for it to go down, and don’t stop investing. But, review your investments, particularly, those that worried you during the correction. This isn’t the time to be taking a lot of risk, either.
