DIFFERENT THIS TIME...I think not
I can't help but notice the fact that the stock market and its forecasters are in clear violation of some very long standing and very accurate 'rules' of wall street.
First and foremost, "Don't fight the FED". When the FED is in a tightening mode, which it seems to be in currently, the rule states that the market will most certainly 'stumble' upon the third hike in rates. To date we have had 5 rate hikes and a 6th is highly predicted for next week. Whether from very low levels or not, interest rates are being raised, and will continue to be unless the FED's optimism about the economy changes for the worse. In addition, with the benign inflation forecasts, and continued productivity advances, the FED seems to have nothing to stop it from continuing on its prescribed path of "measured" rate increases. Most market strategists are calling the recent sell-off a "buying opportunity" in a continued economic expansion.
Second, "sustained high oil prices are followed by recessions". With oil near $50/barrel and many energy experts forecasting sustained high oil prices, we have what would normally be called an "oil shock". While some have called it that, most of the official government comments and statements from FED officials have played down the sustained rise in oil prices. Many argue that the price of oil on an inflation adjusted basis is still well below that of the price in the early 1970's when we had our last serious oil crisis. That argument may make them feel better and may calm some fears of potentially higher prices, but the facts are less sanguine. With oil prices at current levels, the price is some 50% higher than it was just 1 year ago. Whether inflation adjusted or not, that is a sharp rise and will change the budgets of many consumers and businesses. Oil prices have far reaching effects and rapid and sustained rises will almost certainly cause cost issues for many parts of the economy.
Either one of these factors, rising interest rates or high energy prices, alone would be bad for any economy. The combination could be even worse. Yet, the US economy isn't just any economy, especially of late. Over the past 3 years, low interest rates, which encouraged enormous debt creation, have been the lynch pin for the recent economic recovery, including the dramatic rise in real estate values and the huge cash extraction from that real estate. In addition, low interest financing has allowed automobile manufacturers to flood the market with SUV's that are less than fuel efficient, thus adding to the demand picture for oil.
First and foremost, "Don't fight the FED". When the FED is in a tightening mode, which it seems to be in currently, the rule states that the market will most certainly 'stumble' upon the third hike in rates. To date we have had 5 rate hikes and a 6th is highly predicted for next week. Whether from very low levels or not, interest rates are being raised, and will continue to be unless the FED's optimism about the economy changes for the worse. In addition, with the benign inflation forecasts, and continued productivity advances, the FED seems to have nothing to stop it from continuing on its prescribed path of "measured" rate increases. Most market strategists are calling the recent sell-off a "buying opportunity" in a continued economic expansion.
Second, "sustained high oil prices are followed by recessions". With oil near $50/barrel and many energy experts forecasting sustained high oil prices, we have what would normally be called an "oil shock". While some have called it that, most of the official government comments and statements from FED officials have played down the sustained rise in oil prices. Many argue that the price of oil on an inflation adjusted basis is still well below that of the price in the early 1970's when we had our last serious oil crisis. That argument may make them feel better and may calm some fears of potentially higher prices, but the facts are less sanguine. With oil prices at current levels, the price is some 50% higher than it was just 1 year ago. Whether inflation adjusted or not, that is a sharp rise and will change the budgets of many consumers and businesses. Oil prices have far reaching effects and rapid and sustained rises will almost certainly cause cost issues for many parts of the economy.
Either one of these factors, rising interest rates or high energy prices, alone would be bad for any economy. The combination could be even worse. Yet, the US economy isn't just any economy, especially of late. Over the past 3 years, low interest rates, which encouraged enormous debt creation, have been the lynch pin for the recent economic recovery, including the dramatic rise in real estate values and the huge cash extraction from that real estate. In addition, low interest financing has allowed automobile manufacturers to flood the market with SUV's that are less than fuel efficient, thus adding to the demand picture for oil.
The War in Iraq and fear of imminent terror attacks lay the back drop for a future of uncertainty and risk unprecedented in recent history. Our economy is not yet growing on a self sustaining and predictable path so the above mentioned economic issues are even more important than in the past.
The flagrant disregard for what has happened in the past when either interest rates are on the rise or a sustained rise in energy prices is maintained, seems unwise. Add to this the uncertainty of a terror attack, the War in Iraq, and our countrys' current fiscal irresponsibility with regards to the twin deficits, and who knows how bad it could really get. My guess is pretty bad.
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