Last Thursday the DOW JONES INDEX dropped more than 362 points or 2.6%, its fourth-worst trading day of the year. Should this be a cause of concern?
No, this drop was largely the reaction of big institutional investors to the financial services sector, which makes up a large percentage of the DOW. As the WALL STREET JOURNAL said, they were punishing big banks and brokerage firms like Citigroup, Bank of America, Merrill Lynch, Smith Barney and Bear Stearns. These big banks and brokerage firms have been widely criticized in the press for lending billions of dollars to hedge funds on margin who were relending money to mortgage companies who were pushing loans to some people who had no jobs, no credit and no prospect of every paying them back.
As far as I am concerned, these big banks and brokerage firms richly deserve all the punishment their stock prices are taking. This is the free market at its best; the market punishes the stock of companies who have behaved badly!
Unfortunately, everyone should expect further losses by these big banks and brokerage companies. When they announce further losses, they will negatively impact the stock market that day because of their heavy weightings in stock indexes. Expect more volatility in these stocks.
WHERE DOES THE STOCK MARKET GO FROM HERE?
As I have said in the past, in the long run, the stock market always follows the economy. If the economy is growing, the stock market will continue to go up. If the economy is declining, the stock market will go down.
There is no doubt that high oil prices, higher food prices and the declining housing markets are slowing down economic growth.
However, the good news is job growth beat all expectations in October. The Labor Department reported last week that employers added 166,000 positions to their payrolls last month, the best reading since the spring and twice what economists had expected.
While many Wall Street analysts have been concerned that growth will slow in the coming months, the strong jobs report was the latest sign that it hasn't happened yet. The government also said last week that the economy grew at a 3.9% annual rate in the third quarter. This too exceeded all expectations.
The report was taken as evidence that while industries tied to housing continue to contract, a wide range of service businesses are expanding fast enough to more than make up for those losses.
As the housing market continues to decline, economists consider the labor market an even more important economic forecaster than usual. Even if Americans become less wealthy as their homes lose value, they will keep spending money if businesses keep expanding and hiring. Consumer spending is still the economy's main driver.
IT IS CLEAR THAT BUSINESSES ARE STILL HIRING AND YOU CAN'T HAVE A RECESSION WITHOUT LOST JOBS.
In addition to creating more jobs, companies offered higher pay. The average wage for non-supervisory workers rose 0.2% from September, to $17.58 per hour, a 3.8% rise over the past year.
It usually takes four to six months for an economy to change from a growing expanding economy to a declining economy. Based on the strong job growth statistics and the higher than expected economic growth in the last quarter, the economy should continue to expand over the next four to six months. Because of this, I believe the stock market will be higher through the end of this year and the first quarter of 2008.
HARD ASSETS PROVIDE A CUSHION WHEN STOCK MARKETS DROP.
As you know, FOXHALL CAPITAL believes that a percentage of all portfolios should be invested in hard assets like gold, precious metals, oil, steel, and other hard commodities that tend to go up during a stock market melt-down.
Last Thursday and Friday was a good example of how this works. Following the DOW
JONES INDUSTRIAL AVERAGE Index’s fall of 362 points on Thursday, gold, which usually rises in uncertain times, rose sharply on Friday morning to close above $800 an ounce for the first time since 1980.
This is just another illustration of how the FOXHALL CAPITAL global investment strategy provides an extra level of diversification of risk that is rarely found.
Until next week…