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Even With the Bailout Bill, Markets May Still Struggle
Yesterday morning, the U.S. Bureau of Labor Statistics released its September employment report. Payroll employment fell by 159,000 relative to August, the unemployment rate remained unchanged at 6.1 percent (I had expected this to rise) and average hourly earnings rose by 0.2 percent. What was the market’s reaction early in the trading day to this disappointing report? The opposite of what was expected. Stock market futures improved substantially. And, with this bad news, interest rates rose, as did the U.S. dollar. Perhaps the only expected result was the movement out of industrials, which are cyclically sensitive. What happened? “Other things” were not even close to being equal. The weak employment report was perceived as increasing the likelihood of the passage of the rescue plan later in the day. Furthermore, credit-crisis effects were not reflected in the September report, so upcoming employment reports should be even more disappointing. Thus, markets appeared to be building in the presumption of a Fed rate cut, possibly as early as the same day, should the legislation fail to pass. What about industrials? These are pro-cyclical, so with a slowing economy, you should expect these to decline. But, industrial companies also tend to rely substantially on externally generated funds. So, in light of the current and ongoing financial difficulties, even after the rescue legislation passed, there are questions about how far down industrials might fall in coming months. Where did the money exiting industrials rotate to? To large banks that have the money, even if they aren’t necessarily willing to lend it. I continue to believe the Fed must lower interest rates, not only because of the ever-rising importance of expectations in a climate such as this, but because the current Fed funds rate target of 2 percent is nothing more than a target. All the injections of liquidity the Fed has made over the past few weeks have moved the actual Fed funds rate to well below its 2-percent target. So, should the Fed decide to enforce its existing target, it would have to withdraw a substantial amount of liquidity, which would further exacerbate the current national recession (I continue to believe the United States has been in a recession since January) and global weakness. Finally, even with the approval of the rescue legislation, it is not realistic to expect equity markets to go straight up from here. There is still a national recession, Europe and Asia are weakening and global weakness will continue. There is an old stock market saying: Buy on the rumor, sell on the news.“The news” is the passage of the legislation. Don’t forget that there is still a great deal of money waiting to sell into any rallies. And, once the legislation passed, the anti-shorting ban will automatically expire in a few days. What will happen when this is removed? There’s one way to find out. So, don’t be discouraged if you have difficulty following all that is occurring. These are very atypical economic times, where exceptions to the “normal” rules have become the norm. |
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