Will the Latest Fed Cut Be the Last?

Stocks rallied strongly in April. Perhaps expectations had fallen to such low levels that investors decided all those corporate earnings reports did not look so bad after all. The stocks in our two largest sectors, industrials and technologies, did particularly well last month. Sohu.com (SOHU), which surged more than 50%, was our best performer. Our Top 50 recommended portfolio is down less than 1% year-to-date. While we are not happy with any loss, at least that puts us well ahead of all the major stock market indices.

As readers know, I turned bullish on stocks in February. Despite this, I remain bearish on the economy. And although the latest GDP report showed growth for the first quarter, it gave me no comfort. The 0.6% advance estimate is certainly better than a decline, but there were a number of things in the report that worry me. It turns out that a good part of the GDP’s gain was the result of a rather large increase in non-farm inventories. Yet growth in personal consumption expenditures was very anemic.

In fact, expenditures for both durable and non-durable goods fell. Only services showed an increase. Furthermore, despite the weakened dollar, imports still increased. They climbed 2.5%. With oil prices hovering near $120 per barrel perhaps that’s no surprise. And exports, although up, increased just 5.5%. Given how the Fed has destroyed the value of the dollar, I would have expected a drop in imports and a bigger increase in exports. The most worrisome measure, however, continues to be the plunge in residential fixed investment. It fell 26.7% in the first quarter.

This result is consistent with the dismal figures reported each month from Standard & Poor’s for the Case-Shiller Indices. According to the most recent release, home prices in every one of the 20 markets tracked declined from January to February. Every market but Charlotte saw year-over-year price declines. Worse still, housing prices continue to fall at an accelerating rate. Despite the growth (albeit anemic) in GDP documented for Q1, I still believe the economy is in recession. Because the advance figure is subject to revision,the economic bulls should not breathe a sigh of relief yet. Even if the revised figure remains positive, that does not rule out a recession. Granted, the classical definition of recession is two quarters of contraction.

However, the official definition is much less restrictive. The National Bureau of Economic Research, which is the body that gets to decide if we really had a recession or not, defines recession simply as a “significant decline in economic activity spread across the economy, lasting more than a few months.” It seems to me that we have already met that standard.

The Fed’s April 30 decision to cut interest rates certainly seems to support this view. This latest cut brings the Fed funds target rate to 2%, down from 5.25% when it began this process last September. For the second time in row, two members of the FOMC voted not to cut rates. Despite these dissents, the Fed’s action and the accompanying statement clearly signal a greater concern about an economic slowdown than they do about inflation.

Many investors are betting (and some are praying) that this will be the Fed’s last interest rate cut for quite some time. With the dollar’s value all but vaporized and with dollar-denominated commodity prices at sky-high levels, I hope they are right about that.

Comments

[sivere]

Who cares. We need to


TakeBackTheFed.com

[the final horseman]

even the zimbabwe dollar went up against the funny money the FED pumps out. what does this say?

[sivere]

Q: "even the zimbabwe dollar went up against the funny money the FED pumps out. what does this say? "

A: TakeBackTheFed.com