This is where things get interesting....
February 2, 2001
`There is no question that what is happening in Western power markets is a tragedy of immense proportions,'' said Peter Fox-Penner, an industry expert with the Brattle Group in Washington. ``As a student of energy history, I believe there is really no parallel for this episode in the history of the developed world.''(http://www0.mercurycenter.com/premium/front/docs/west01.htm)
Well, as Bush and the country begin to realize that the Cali energy crisis is slowly engulfing the entire Western region and threatens to ignite a national energy crisis, Greenspan and his buddies have desperately slashed interest rates again by a sizable chunk...wiping out all the interest rate increases of 2000 that they never should have instituted in the first place.
So what's next? The threat of recession is VERY real now. The Fed's actions in January are evidence that the threat is real. It is only a matter of time before we find out whether they are too late. Already, the numbers indicate our manufacturing sector is NOW in recession (and may have started a recessionary decline in December). The energy crisis is the one shock that could seal the recession deal (as I stated late last year, we are essentially one shock away and Greenspan admitted as much in December). We have all heard of the rapid increase of layoffs across industries, not just dot-coms. Many big companies are now laying off thousands (Lucent, Xerox, GE, Daimler-Chrysler). Again, we will know soon whether the economy will be able to absorb our recently out-of-work neighbors. My guess is that people in industrial sectors, particularly in the Midwest, are in for very tough times this year.
The confounding part of the equation is that the rapid decline in interest rates has stoked housing sales across the country. Because labor markets remained tight last year and people were still collecting high salaries as a result, this reduction in interest rates meant people with money were free to rush out to buy homes and refinance existing ones. This buying activity is very inflationary as the Fed continues to chop interest rates. Only a real rise in unemployment will stop that inflationary threat. However, the Fed is concerned that the simultaneous drop in consumer confidence will thwart any renewed investment activity by corporations. Very strange, right? Consumer confidence is rapidly sinking yet home sales are skyrocketing!!!
The numbers from company earning reports are still mixed. We are definitely seeing many more companies reporting losses and warning about the next six months. The current danger is that most companies, and analysts, have assumed that the economy will return to health in the second half of the year. This has set up huge expectations that, if not met, will send the stock market spiraling and certainly seal a recessionary deal if we are not already there by then.
Because of the historical relationship of decreasing interest rates and increasing stock prices, now is the time to be a cautionary bull as an investor. There is no need to sell off anything but your weakest holdings that did nothing in January. The market is currently over-extended, so buying most stuff now is like buying high. But buying on the dips is back in vogue now. You also still have time to get into or add to your favorite mutual funds and/or stocks. If you have 401K plans, you should increase your stock contribution vs the cash (e.g. money market) portion. If you have not already locked in some high-yielding CDs, you better do it soon because interest rates ain't going back up anytime too soon (except in the most disastrous of scenarios). Be on guard for economic signals, particularly as the next Fed meeting approaches March 20 and then on through the Spring. Finally, if the economy continues to spiral downwards this month, the Fed is likely to surprise us with another significant rate cut. They have promised to act aggressively and swiftly to beat back this downdraft (this is just what the "Internet Depression" doctor would have ordered). Thus, most bad economic news becomes good news for the stock market. Any news showing the economy is stronger than expected means the Fed doesn't need to (or can't) cut rates further.
Take care, and be careful out there!