February 17 - The Proximal Stock Market Landing
The release of today's tame PPI report brought the analysts out of their chairs so they
could once again note that inflation remains low due to productivity increases, even though the economy is still strong. But less than two hours after the release Greenspan reminded everyone that while the
current economic expansion is impressive the word "unsustainable" should be understood now more than ever.
With exceptional future earnings already priced into most large cap issues and at least
one more rate hike arriving in March there is no fundamental reason why stocks should rally off of benign PPI and CPI reports. The fact is that the economy is on a tear and it must slow so that problems do
not arise and slowing the economy (stocks) is a difficult task.
Greenspan said it best today with this quote
"With foreign economies strengthening and labor markets already tight, how the current wealth effect is finally contained
will determine whether the extraordinary expansion that it has helped foster can slow to a sustainable pace, without destabilizing the economy in the process".
The longest running economic expansion on record in large part has been fueled by rising asset prices but has also benefited from lower unemployment, a record trade-gap
(strong dollar), increased debt and decreased savings. While it is one thing to believe that stocks can pause in mid flight as these growing imbalances are worked out it may be overly optimistic to assume
that since eye-level inflation remains low that everything is fine and stocks are a "go".
Typically destabilizing impacts to the economy arrive when a knee-jerk reaction to the changing economic landscape
hits market psychology. A possible example of how such an occurrence could arrive is present when looking at the stock markets today; There are estimates for Dow 14,000 and Nasdaq 5,500 by years
end. If these estimates were reached the probability of a pick up in labor pressures, commodity prices, and overall inflation rises and the inevitable fallout is almost unthinkable if psychology abruptly
changes...
"Boom and bust" would once again become a reality and not just a cliché.
The markets could rally off of PPI and CPI but it may only last until the next batch of economic reports are due
out. The current trading atmosphere is nothing more than a condition of the bull market which must be "finally contained" at some point. The truth is that the sentiment shift, be it devastating or
not, doesn't matter so much as the understanding that the landing is near. Whether or not another rally can occur in equities before that landing arrives is the only question left to ask.
Even with all the implications for decreased euphoria in the markets in today's Greenspan testimony, he has still only mentioned and never directly targeted margin rates. Feb 10 Greenspan Can't Aim
|
