|
Commentary:
The Decade's Turning Point?  July,
2005 --
It may prove an exaggeration of intuition, but I sense
the potential for an equity market similar to the 1995
to 1998 time period. For five years, since March of
2000, we have paid dues for the irrational finish to
the 1990's decade. In 2001, I remember thinking it
would be 2004 before we could move higher, based on
historical averages and the cited excess in last years
of the decade. In other words, we had overshot the
average return from equities so much that more than a
couple of years were needed to revert to the mean.
Furthermore, in this time period, political
developments contributed in ways we all know about more than
we want to know. However, the market’s
non-overreaction to last Thursday’s (July 7, 2005) London terror
may prove a historical turning point both economically
and politically.
Currently, we have stocks as cheap versus
bonds now, as they were expensive compared to bonds at
the top of the bubble. And similarly, bonds as
expensive compared to stocks now, and as they were
cheap at the height of the equity top. FYI:
historically, bonds and stocks work out to equivalent
trades over time. (Thus, the market's efficiency theory point)
Even if Greenspan continues to increase rates,
he is “correcting” for the historical lows that
still characterize interest rates. That, more than any
sign of inflation is behind the rate increases.
However, global demand for US Treasuries and global labor markets are keeping the long-end
of the yield curve so low and flat, he may have to
stop to prevent an inverted yield curve.
Oil has been a good excuse for a poor first
half; yet, oil dropped last Thursday and once the
media gets immune to tropical storms, the recent
spiking should stop. Moreover, supply isn’t the
problem; it’s refining capacity. Emotions will
subside in time.
The fact earnings are exceeding expectation, as
Q2 announcements are showing, will help the investment
“mood” and show that oil, while a
"brake" on the
economy, isn’t stopping companies from making money.
Indeed, earnings have grown at twice the rate of the
market indices since the earnings trough in 2001;
eventually, these earnings will be priced into stocks.
(This is applicable to any measure of earnings, e.g.,
operating, GAAP, etc.)
Pleasant to see for this supply-sider, tax
revenues have been so strong that the federal budget
deficit will likely be $100B less than expected…keep
lowering taxes Congress!
Another lag factor, unemployment at 5% is now back to
2001 levels.
The dollar has been stable; and the Euro
hasn’t been winning popularity contests.
Finally, the fact Intel was up last Thursday and
the semis continue strong since late spring, speaks
volumes as to what awaits the rest of the equity
market.
In short, July 7th may prove to be a turning
point in the market’s performance for this decade,
as well as indication the terrorists are losing the
war (e.g. Every attempt to terrorize has been weaker
since 9/11. And, I pray this continues to be the
case).
Return to Top |
