Markets might be turning
Flat. That's how the Commerce Department described July industrial production at the nation's plants, mines and utilities in a report earlier this month.
The next day, it indicated new home construction in July had risen only slightly. These announcements followed bearish financial forecasts by several key corporations that seem to confirm dismal views about the economic recovery.
Stock prices depend on earnings growth, which in turn, rely on economic strength. A flat economy threatens corporate earnings and provides support for the Federal Reserve to continue its monthly bond purchases to spur growth.
Reinforcing the adverse economic data were a bunch of disappointing earnings reports and warnings. Bellwether companies, such as retailer Wal-Mart and tech favorite Cisco, lowered their sales and earnings guidance for the next quarter.
The housing market has been one of the strongest performers this year, but the recent news is becoming disappointing. Mortgage applications have been declining, according to Mortgage Bankers Association, apparently because of rising interest rates.
The Commerce Department added to this mix of depressing economic and housing market news by reporting Friday that new-home sales dropped 13.4 percent to a seasonally adjusted annual rate of 394,000. That's the lowest pace in nine months.
This news tended to puncture what had been an increasingly bullish sentiment that a housing recovery was under way. Housing construction is one of the most important “multiplier” and labor-intensive industries, stimulating activity and employment in many associated industries. News of a housing downturn reinforced the view that despite its $85 billion in monthly bond purchases and near-zero interest rates, America may be following the European Union and other economies into recession.
The result is an increasingly bearish outlook for equities. The Dow Jones industrial average has retreated from its high on Aug. 2 and is down 3.2 percent for the month as investors ponder when the Fed will taper its bond purchases aimed at holding down interest rates.
The possibility of higher interest rates would only boost negative sentiment. The Fed minutes last week did not give any clear indications when policymakers would end their bond purchases. But investors may be concluding that the huge Fed-inspired stock market subsidy has run its course and now is a good time to cash out.
Adding to the confusion is increasing uncertainty over the Fed's new leadership and future policy. Chairman Ben Bernanke is expected to step down when his second term ends in January. Fed Vice Chair Janet Yellen and former Treasury Secretary Larry Summers are jockeying for the job.
Nevertheless, continuing uncertainty over the timing and how quickly the Fed will wind down its bond purchases remains disruptive to financial markets and causes volatility.
Should interest rates continue to rise as they did last week, billions of dollars may flood out of bonds into equities, boosting prices temporarily. But this would be pure speculation.
Conservative investors may be inclined to take large profits from the Fed-induced bull markets in both bonds and equities and move to cash or precious metals.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- High school roundup: Mars upsets No. 4 Hampton in GAC
- Central Valley gains measure of revenge on No. 1 West Allegheny
- Linebacker Harrison coming along slowly since return to Steelers
- Roundup: PUC schedules hearings for FirstEnergy rate increase; New-home sales almost flat in September; more
- Late TD lifts Penn Hills past Woodland Hills
- Fire at Flight 93 National Memorial hints at struggle to safeguard historic artifacts
- Running back depth, defense carries Thomas Jefferson past West Mifflin
- Royals take 2-1 lead in World Series after 3-2 victory over Giants
- Laurel Highlands clinches playoff berth with 49-21 victory over Albert Gallatin
- Knoch shuts down Yough, clinches playoff berth
- Corbett, Wolf resort to sticks, stones to attract attention