Markets in a Nutshell
February 22, 2010 Issue
Stocks were up sharply last week. The Dow Jones Industrial average gained 3% and is now just about flat for the year (small loss of 0.2%). The S&P 500 was up 3.1% and also shows a small year to date loss of 0.5%. The Nasdaq jumped 2.8% and is down 1.1% for the year. Bonds remain up for the year with Barclays Aggregate Bond index up 1% for the year. The U.S. dollar has continued to gain ground vs. other currencies and is up 3.4% for the year. The rising dollar has hurt returns in foreign markets as the foreign stock index (EAFE) has lost 5.7% so far in 2010.
As we are likely in the midst of a large scale restructuring of the world economies (a once or twice every century occurrence), expect to hear more news about entire industries retooling, new ways of doing things, and some of the pains and joys that come with it. An article in the 2/2 Wall Street Journal titled "Radical Shifts Take Hold in U.S. Manufacturing," explains some of what is going on. The article points out that America's industrial companies (companies that manufacture stuff like cars, refrigerators,computer chips) are going through the biggest restructuring in decades of how and what they make. How so? Read on...
Industries such as Printing, Furniture, Motor Vehicles, and Plastics are all reducing capacity (how much stuff they make) as those type of industries are hurt by the shift (first time in 50 years) to a "more saving, less spending" consumer here in the U.S. Other industries such as Semiconductors, Computers, Communications Equipment, and some of the specialty manufacturers are gearing up for more sales as companies, big and small, look to be more productive with less (or the same or as little growth as possible in the) quantity of workers. More on this. Read on...
Look for this trend to continue (with fits and starts. Rarely does any large scale restructure occur quickly and easily) which means that long term investments in the technology area and specialty manufacturers may well outperform as those type of companies benefit from this trend. As a note, we hear from many of you who are in manufacturing that you have and continue to "retool" your businesses to prosper in this "new" economy.
The Labor Dept. reported consumer prices rose only 0.2% in January. For the past 12 months, prices have risen 2.6%. Sometimes economists "strip out" the changes in energy and food (which can be very volatile and skew numbers) prices which would put the inflation number for January at negative 0.1% (meaning overall prices for stuff we buy dropped), the first time a drop in the "core" (without energy and food) number has occurred since 1982. So why there has been talk of runaway inflation (remember the 1970's?) happening soon, there are more deflationary/disinflationary (lower price increase or even decreases) pressures in the economy right now.
Which brings us to the Federal Reserve raising of the discount rate (the rate on emergency loans from the Fed to member banks) from 0.50% to 0.75% on Thursday. Likely a "symbolic" act, we would agree with our friends at bond giant Pimco investments, who don't believe the Fed will raise the much more used fed funds rate (the rate at which banks charge each other for overnight loans) for some time to come. After all, it is an election year and raising interest rates in a just recovering economy wouldn't help in the short term or getting re-elected for that matter (it would help heal the economy better for the long term but hey, who looks at the long term in Washington?). So perhaps the bond price bubble may go on a while longer.