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August 1, 2008

Stock market

Filed under: Economics — Fei @ 7:18 pm

It’s mid-year time, and I’d like to have a mid-year review of the direction of the stock market. I made some predictions at the end of January. It seems I’m quite lucky that they are more or less in-line with what really happened.

The stocks reached new lows in the middle of July, which was close to the far end of my prediction. I didn’t expect the rebound so strong after the March dip, however. In January, the market was not sure how serious the sub-prime mortgage issue was, stock dropped. In March, the market was shaken by the collapse of Bear Stearns, thus, retreated. The continuous write-downs of the financial institutions dampened their future prospect, which resulted the July retreat. I totally oversaw the impact of credit tightening, however.

Starting June to middle of July, the stocks decline steadily. It may be due to several factors: 1) Public has lost confidence of financial institutions (as I mentioned above). 2) The security tightening strategy has spread outside the realm of mortgage and banks. and 3) Higher oil and food price drive up inflation. We’ve only seen a small portion of it, however.

My prediction for the future economy direction is as follows:

Even though we still see new records of foreclosures, the sub-prime mortgage crisis is largely over.  We’ve also seen the worst of bank write-downs. The financial industry has bottomed (or almost) in July. However, the economy is at a critical point now. The crisis is at the verge of spreading outside the financial industry. It really depends whether it can be contained. The key indicators are consumer confidence index and jobless rate.

The consumer confidence index slide to the lowest point in 16 years in June, and held steady in July. To me, it is a good sign that the economy has bottomed. It is mainly because consumer is the end of the “economic” chain. The index usually reacts to crisis several quarters after the real cause. When consumers feel the pressure, the market has already digested the crisis and absorbed most of the pain. Thus, it’s a good time to get into the market.

The jobless rate, however, is not very optimistic. In today’s news (08/01/08), the jobless rate climbed to a four-year high. Not a good sign. It may mean the consumer confidence index staying at the low end for some time. The economy is not due for a rebound anytime soon.

Looking at the market, however, I don’t see any real reason people should worry about further retreat. In my opinion, market panic on the mortgage and credit is over reacted. The panic keeps the stock from
rebounding, but it won’t hold for long. The real enemy, is still the inflation. In January, I predicted that we would see the impact of inflation around this time. I was mistaken. The bulk impact has not arrived yet (It takes longer time for inflation to accumulate strength). On the good side, however, the inflation may not be as serious as I originally thought. The recent retreat of oil price is a good sign. I don’t see any support for such high oil prices. However, Bernanke is in a tough job fighting inflation. He cannot simply raise overnight interest rate because of its adverse impact on financial industry. What other weapon can he utilize?

In my opinion, the stocks will walk sideways till the end of the year. 2009 will be a good year for stocks and I’m looking forward to that.

Well, I will see how wrong I am in half a year.

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