Wall St. Forecast: Status Quo
Much of Wall Street was hoping to get back to work this week with a definitive view of the economy: Either the glass is half-full or it’s half-empty.
But the August employment report issued by the government on Friday may have left many investors with the sense that the glass is just ... half.
For financial markets, the five-second summary may be that not a lot is likely to change soon. Looking into 2005, however, there is a growing sense among some economists that the Federal Reserve’s credit-tightening campaign will slow. That could alter the dynamics for stocks and bonds as investors start thinking more about the new year.
The net gain of 144,000 jobs in August, as reported by the Labor Department, nearly matched economists’ average forecast and was the biggest increase since May.
The direction was encouraging, but it failed to thrill many stock investors who have been hoping to see more solid evidence of economic strength. At the same time, the report wasn’t particularly frightening to Treasury bond investors who have been betting that the economy would remain middling, at best, thus keeping interest rates subdued.
The blue-chip Standard & Poor’s 500 index slipped 0.4% on Friday, to 1,113.63, though it gained 0.5% for the week -- the fourth straight weekly advance since stocks hit their lows for the year Aug. 12.
In the bond market, the yield on the benchmark 10-year Treasury note rose to 4.28% on Friday from 4.21% on Thursday, but that just put the yield back to where it was Aug. 24. Long-term interest rates have mostly been declining since mid-June, when the T-note peaked at 4.87%.
Even allowing that many investors were absent Friday, taking the last of their summer vacations, the bland reality of the August employment data won’t change as more players return to the markets this week.
Job growth turned higher last month and was nearly double the net 73,000 jobs added in July (which was revised up from an original reading of 32,000).
But a robust economy should be adding jobs at a pace of 200,000-plus per month, many analysts say.
What’s more, there have been plenty of other data suggesting that the words “robust” and “economy” don’t belong in the same sentence these days.
Major retailers last week reported generally sluggish August sales. General Motors Corp. and Ford Motor Co. said they would cut auto production amid weak sales. The Institute for Supply Management, which tracks manufacturing activity nationwide, said business slowed modestly last month from July. And semiconductor leader Intel Corp. did the optimists no favors on Thursday by lowering its sales estimates for the third quarter.
Still, there has been some good news too: The price of crude oil, at $43.99 a barrel Friday, has come down from the record high of about $49 in mid-August. And natural gas prices have tumbled to nine-month lows amid rising supplies.
If higher energy costs have been an added tax on consumers in recent months, then lower prices, if sustained, could be the equivalent of a tax cut.
Even so, some analysts say, it would be naive to bet that consumers will sharply boost their spending soon. Many people just don’t have it, said Paul Kasriel, economist at Northern Trust Co. in Chicago.
“I think their ability to spend is becoming more constrained,” Kasriel said. “They’re borrowed up. They have to slow down.”
Other analysts point to more encouraging Labor Department data showing that wage growth, overall, has been accelerating in recent months. Spending is largely determined by income growth.
One sure way to lift the national income level would be to put more people to work. Which is why the monthly employment report has taken on such significance on Wall Street -- perhaps to the point of absurdity.
For its part, the Federal Reserve must believe there is a lot more to this economic expansion than the jobs numbers. The central bank’s party line for the last few months has been that the economy hit a soft patch in late spring but that growth is bound to pick up again.
In a letter to Congress last month, responding to lawmakers’ questions about the economy, Fed Chairman Alan Greenspan said the global recovery was becoming “stronger and more sustainable.”
The Fed’s critics say it has taken on the role of cheerleader, trying to talk the economy into faster growth.
The same might be said of chief executives of the nation’s biggest companies. A Business Roundtable survey of those CEOs, released last week, found that 40% were planning to hire more workers during the next six months. That was up from the 25% who projected more hiring in a December survey.
Even if a CEO isn’t planning to hire, it sounds better to say you will, skeptics say.
As Kasriel put it, borrowing from Gov. Arnold Schwarzenegger’s lexicon: “Why be a girlie-man about the economy?”
The Fed, at least, has a good reason to wax optimistic: It wants to justify further increases in its key short-term interest rate, which at 1.5% remains near generational lows.
When central bankers meet on Sept. 21, they are almost certain to raise their rate another quarter-point, to 1.75%, most analysts say. Most also see another quarter-point increase in November or December.
But after that? In June, the consensus view on Wall Street was that the Fed was at the start of a long cycle of rate hikes. Now, there is a feeling that the Fed might well pause in the first half of 2005 if employment growth remains sub-par.
If job growth doesn’t speed up, “the Fed is going to have to be more cautious” with interest rates, said James Glassman, economist at JP Morgan Securities in New York.
That may explain why many investors have been willing to buy long-term bonds in recent months even as yields have declined. If short-term rates aren’t going as high as had been feared -- or at least, if they aren’t going there in the next 12 months or so -- then longer-term yields at current levels may be decent returns.
What about the stock market?
Investors would like to see a stronger economy because that would be best for corporate earnings. But stocks always have to be judged against the alternatives. If modest economic growth also keeps interest rates restrained, stock gains wouldn’t have to be huge to beat what bonds and money market accounts might pay.
That could mean that the stock market over the next year will look a lot like the market of the last eight months: As measured by broad indexes such as the S&P; 500, there’s a lot of back and forth in a relatively narrow range. Under the surface, however, there are enough interesting stock ideas to keep investors engaged, and coming back for more, in an economy that continues to offer hope -- if not a torrent of new jobs.
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A motley crew of winners
Best-performing S&P; 500 stock industry sectors since June 3
During the last three months the Standard & Poor’s 500 index has rallied, fallen and rallied again, and as of Friday was nearly even with its level on June 3. But some stock sectors have posted substantial gains in the same period.
*--* Steel 27.90% Tires and rubber 23.2% Diversified metals and mining 22.3% Oil and gas drilling 19.1% Photographic products 17.8% Oil and gas drilling equipment/services 14.8% Industrial gases 14.2% Gold miners 13.5% Home furnishings 11.8% Real estate investment trusts 10.8%
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Source: Bloomberg News
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Tom Petruno can be reached at tom.petruno@latimes.com. For previous columns, go to latimes.com/petruno.
