It's still a bull market
The Standard and Poor's 500 closed at 1,121.20 yesterday, 3.2 percent below its peak this year of 1,157.76 in February, but well off its recent low of 1,084.10 on 17 May. Up till last week, when the S&P 500 gained 2.5 percent, the US stock market had been on an almost continual decline since early April, weighed down by concerns over impending interest rate hikes and increases in oil prices. These concerns, however, may be overdone.
Theoretically, interest rate hikes should have little impact on the stock market if they reflect an improving economy. In fact, the latter by itself should actually augur well for stocks. Of course, valuations are negatively affected by higher interest rates. The two factors tend to cancel each other.
Furthermore, the latest data show that inflation remains low even as the US economy continues to grow. In April, consumer spending was up 0.3 percent and incomes rose 0.6 percent, but the core personal consumption expenditures index was up only 0.1 percent or 1.4 percent year-on-year.
Employment data, which had been so strong in March and April and which had fuelled much of the fears for an interest rate hike, have not been as strong recently. On 27 May, the US Labor Department reported that the number of people filing for first-time unemployment insurance claims for the previous week was 344,000. This was down from the revised 347,000 reading on initial filings for the week before, but higher than the 335,000 expected by economists surveyed by Briefing.com. Also, the four-week moving average for claims rose by 1,500 to 335,500.
Overall, these data indicate that there may not be a need for the Federal Reserve to raise interest rates as aggressively as analysts had thought.
As for oil, crude oil futures surged past US$42 a barrel on 1 June after the killing of 22 people last weekend in Khobar, Saudi Arabia raised concern that attacks by Islamic militants might disrupt shipments.
However, the impact of oil prices on the economy is not as great as what it was in the 1970s, as pointed out in an article in The Business Times on 24 May titled "Markets in for rough ride as Opec defers output decision".
"The growth of service industries, combined with higher productivity levels, has reduced the energy intensity of OECD economies dramatically," said UK information group Oxford Analytica. "The amount of oil the OECD uses to produce one dollar of real GDP halved between 1973 and 2002. The International Energy Agency estimates that the oil import bill for the OECD region last year was worth only about one per cent of the region's GDP."
US Council of Economic Advisors chairman Gregory Mankiw also said that while oil prices may be a "headwind for the US economy", they do not pose a significant threat to recovery.
In any case, much of the increase in oil price is the result of China's surging demand. Efforts by the Chinese government to cool its economy may curb that demand. Already, China's State Development Reform Commission has reported that prices of steel products and non-ferrous metals are sliding. "The government's bid to rein in raw material prices is kicking in," DBS Hong Kong economist Chris Leung told Bloomberg.
Many analysts also think that the bull market is intact, based on another article titled "It's still a bull market, say Wall St analysts" on 24 May in The Business Times. According to the article, investors have over-reacted and the sell-off on Wall Street has gone "too far".
Ryan & Beck investment strategist Joe Battipaglia thinks that investors are overreacting on the negative side in the face of an improving jobs market and the prospect of rising interest rates. "I think once investors take a deep breath and look at what's going on, the market will start climbing again," he argued.
Chuck Hill of Thompson/First Call is similarly optimistic. "Early in the year, people were worried that from the first quarter on, profit growth would slow once we started coming up on tougher year-over-year comparisons, but just the opposite is happening. The profit picture looks great through the end of the year," he said.
Peter Halesworth, president of Libertas International, attributes the downturn not to a negative shift in market fundamentals but to "a messy sector rotation. Investors simply waited too long to shift their positions and now they're being caught in a short squeeze". Investors had been too complacent, assuming that the liquidity drive would continue indefinitely.
He foresees a gradual, if choppy, trend up over the summer for the stock market, followed by a stronger bullish move in the fall, although that could be delayed until after the presidential elections.
The latest economic indicators released yesterday support his forecast. The Institute for Supply Management's index of national factory activity rose to 62.8 last month from 62.4 in April. The US Commerce Department reported that construction spending rose 1.3 percent in April to a seasonally-adjusted annual US$970.4 billion, the third consecutive record high.
So yes, it is probably still a bull market, although the ride may be a little rough for the next few weeks or months.
Theoretically, interest rate hikes should have little impact on the stock market if they reflect an improving economy. In fact, the latter by itself should actually augur well for stocks. Of course, valuations are negatively affected by higher interest rates. The two factors tend to cancel each other.
Furthermore, the latest data show that inflation remains low even as the US economy continues to grow. In April, consumer spending was up 0.3 percent and incomes rose 0.6 percent, but the core personal consumption expenditures index was up only 0.1 percent or 1.4 percent year-on-year.
Employment data, which had been so strong in March and April and which had fuelled much of the fears for an interest rate hike, have not been as strong recently. On 27 May, the US Labor Department reported that the number of people filing for first-time unemployment insurance claims for the previous week was 344,000. This was down from the revised 347,000 reading on initial filings for the week before, but higher than the 335,000 expected by economists surveyed by Briefing.com. Also, the four-week moving average for claims rose by 1,500 to 335,500.
Overall, these data indicate that there may not be a need for the Federal Reserve to raise interest rates as aggressively as analysts had thought.
As for oil, crude oil futures surged past US$42 a barrel on 1 June after the killing of 22 people last weekend in Khobar, Saudi Arabia raised concern that attacks by Islamic militants might disrupt shipments.
However, the impact of oil prices on the economy is not as great as what it was in the 1970s, as pointed out in an article in The Business Times on 24 May titled "Markets in for rough ride as Opec defers output decision".
"The growth of service industries, combined with higher productivity levels, has reduced the energy intensity of OECD economies dramatically," said UK information group Oxford Analytica. "The amount of oil the OECD uses to produce one dollar of real GDP halved between 1973 and 2002. The International Energy Agency estimates that the oil import bill for the OECD region last year was worth only about one per cent of the region's GDP."
US Council of Economic Advisors chairman Gregory Mankiw also said that while oil prices may be a "headwind for the US economy", they do not pose a significant threat to recovery.
In any case, much of the increase in oil price is the result of China's surging demand. Efforts by the Chinese government to cool its economy may curb that demand. Already, China's State Development Reform Commission has reported that prices of steel products and non-ferrous metals are sliding. "The government's bid to rein in raw material prices is kicking in," DBS Hong Kong economist Chris Leung told Bloomberg.
Many analysts also think that the bull market is intact, based on another article titled "It's still a bull market, say Wall St analysts" on 24 May in The Business Times. According to the article, investors have over-reacted and the sell-off on Wall Street has gone "too far".
Ryan & Beck investment strategist Joe Battipaglia thinks that investors are overreacting on the negative side in the face of an improving jobs market and the prospect of rising interest rates. "I think once investors take a deep breath and look at what's going on, the market will start climbing again," he argued.
Chuck Hill of Thompson/First Call is similarly optimistic. "Early in the year, people were worried that from the first quarter on, profit growth would slow once we started coming up on tougher year-over-year comparisons, but just the opposite is happening. The profit picture looks great through the end of the year," he said.
Peter Halesworth, president of Libertas International, attributes the downturn not to a negative shift in market fundamentals but to "a messy sector rotation. Investors simply waited too long to shift their positions and now they're being caught in a short squeeze". Investors had been too complacent, assuming that the liquidity drive would continue indefinitely.
He foresees a gradual, if choppy, trend up over the summer for the stock market, followed by a stronger bullish move in the fall, although that could be delayed until after the presidential elections.
The latest economic indicators released yesterday support his forecast. The Institute for Supply Management's index of national factory activity rose to 62.8 last month from 62.4 in April. The US Commerce Department reported that construction spending rose 1.3 percent in April to a seasonally-adjusted annual US$970.4 billion, the third consecutive record high.
So yes, it is probably still a bull market, although the ride may be a little rough for the next few weeks or months.
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