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Bungee jumping
Until equity investors see signs of economic growth, stock prices are not going to recover. Week after week, economic data has
disappointed. Initially, equity investors were thrilled with the Fed's rate cuts because they promised an eventual economic recovery.
Unfortunately, investors aren't a very patient bunch. We've noted in the past that it takes more than six months before a reduction in
interest rates has any influence on economic activity. Though the Fed has reduced the federal funds rate target by 300 basis points, it will
take time before the lower rates have an impact on economic growth. In the meantime we are likely to see more signs of weakness in the
months ahead and this could continue to have a dampening effect on stock prices. It seems that we are now experiencing the opposite of
irrational exuberance. But then, we've said that before too.
Weak economy = lower bond yields
Sluggish economic activity is generally favorable for the bond market because a weak economy can translate into lower interest rates.
The latest employment situation was sufficiently weak enough to generate expectations for an additional rate cut beyond the 25 basis
points that were already expected in October. Economists are lowering growth forecasts and predictions of rate cuts abound.
Markets at a Glance Recap of US Markets The Economy The Bottom Line Looking Ahead
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