The stock market was flat last week. Not a bad performance given that the popular averages are up between 10% - 14% (S&P 10%, Dow 13%, NASDAQ 14%) thus far this year and the market is wrestling with the question of continued economic growth (and, if so, how much) or recession. Last week, the market digested mixed reports on corporate earnings, more bad news about the housing market, a benign PPI number, a continued low level of business inventories, and record oil prices.
Retail sales were up a surprising 0.6% in September. This increase was posted in spite of unseasonably warm weather (ask Al Gore) which reduced demand for winter apparel. Retailers are already bemoaning anticipated weak Christmas sales. Christmas before Halloween? What happened to the Christmas selling season starting after Thanksgiving? (The good news is that retailers are setting a low bar for investor expectations.) Retail sales are important, consumer spending comprises two-thirds of our economy. The key to continued consumer spending will be what happens to home and energy prices. If home prices continue to decline, consumers will retrench in response to their declining net worth.
Oil hit a record high of $83.60 last week. Anyone who doesn’t think there’s a global energy shortage should read South American Nations Face Energy Crunch in the New York Times, October 13th. Our economy has been remarkably resilient to rising (soaring) energy prices, unlike our experience in the 1970’s. At some point rising energy costs will force the consumer to cut back spending in other areas. In the meantime, rising energy prices worsen our balance of trade deficit and force us to keep looking over our shoulder for signs of inflation.
The stock market is priced at a reasonable forward P/E of 14. As I talked about last week (See The Government was the Last to Know), assuming the consensus corporate earnings growth for 2008 and no recession, the stock market should work its way some 8% higher over the next few months. A very handsome return. Suppose thought that you want to be in the market but are worried about a recession. How should you invest? Come back on Wednesday and I’ll tell you.
