Friday, April 07, 2006

Are the Wheels Coming Off the Stock Market Expansion?

This morning the U.S. Bureau of Labor Statistics announced that the national unemployment rate dipped to 4.7 percent, its lowest level in almost five years, and that the nation added 211,000 jobs in March. This was very good economic news. So why is the market reacting so badly (the Dow lost almost one percent of its value after the jobs numbers came out)?

Before yesterday's low reading for first time claims for unemployment insurance (below 300,000) and today's jobs report were released, investors were dancing through mine fields. That is, most investors, encouraged by Fed officials, thought the Fed would cease raising rates as early as June of this year, thus leaving the funds rate at an acceptable 5.25 percent. It is now very likely that the Fed will continue to push rates higher. In fact I now expect rates to increase by another one percent before the Fed sees the error of their rate hiking ways.

These rate increases will liklely produce several outcomes. First, equity investments will be reduced in value. Second, bond prices will fall. Third, mortgage rates will rise. Fourth, the value of the dollar will rise. Fifth, economic growth will slow, as intended. Unless we investors see some evidence of a cooling labor market, stand by for these bitter pills. Unfortunately in this case, what is good for the worker is not good for the investor!

Remember that semi-old adage--don't fight the Fed.