Another item we have discussed is the equities market. The stock market behaves exactly opposite to the unemployment rate, in that it will begin to improve before the recession is officially declared over. The bottom took place during the week of March 9. The S&P traded at an intraday low as 666. For all of you out there who believe in strange coincidences General Electric had a low close of $6.66 on March 5. I am sure we can’t read anything into this coincidence, but it is amusing to imagine. My wife Sandy, is convinced that the stock market is being manipulated by someone or a group of individuals, so I haven’t discussed this coincidence with her. Based on the day-to-day gyrations, she is entitled to her opinion.
Since March the stock market has slowly improved. It is trading at almost 8500 points on the DOW versus a March 9 low of 6547. The S&P is at 912 versus the 666 number we mentioned above. In less than ninety days the S&P has gone from a large negative for the year to being slightly positive to date. Now that is a nice improvement. I cannot believe this improvement would have taken place if the markets were not convinced the recession has bottomed and will be ending soon.
As we see on a daily basis, there are many who would disagree with my conclusion. The papers and financial television shows seem to have someone on both sides of the fence discussing their reasoning daily. No one said this wasn’t going to be a long slow process. To discount all of the progress that has been made and bet that this is just a correction, seems foolish to me.
There is a negative side to this improving economy and that is the deficit we are incurring. While I have praised the Federal Reserve and both administrations for the actions taken, I sympathize with their deficit dilemma, it is going to be a huge problem going forward. If we could fast forward to May 2011, (if only it was that easy) we may find a much different climate. No I am not referring to global warming, but to a strong economy that is faced with much higher interest rates. My biggest concern is a huge deficit that will require rates that are high enough to attract investors. When questioned about the deficit, the administration has stated that inflation and high interest rates are not the concern at this juncture, the need to get this economy back on its’ feet and moving forward is. These are all very noble objectives. But, tackling the deficit will be our next big problem.
If I am correct and the deficit does cause rates to rise to lofty levels then, the administration and the Federal Reserve will be faced with the old battle of lowering inflation. This will require the Federal Reserve to raise interest rates more, creating our next recession. But wait, the huge deficit must be funded and here is where it gets interesting. We can only hope the administration and the Federal Reserve have discussed this option and have a plan of action. If not then tomorrow’s situation could be equally as concerning as the one we find ourselves in today.
For now this is something to keep me up at night. However, you have enough to worry about with the “slow process” we are currently faced with.
