Robert CaldwellA Few Reasons Why Financial Markets Will Rebound Going into the Weekend.
June 19th 2008 16:11
It’s noon on Thursday, and the Dow currently sits just below 12,000. It’s been a horrible week for financial markets, but I expect that there will be a turnaround heading into the weekend. Here are several reasons why I expect the market to turn:
1) Jobless Claims
Although it remains elevated, the number of newly laid-off workers filing applications for unemployment benefits dropped a bit last week. Layoffs are no longer accelerating but appear to have reached their peak trend for this downturn. Jobless claims are a leading indicator; therefore, if it is true that jobless claims have hit their peak trend, it should be viewed as a positive for the U.S. labor market going forward.
2) China’s Oil Proclamation
As every American knows, oil prices have been a large economic concern recently. Oil prices dipped $3 today, on the news that China (a socialist state) will raise retail gasoline and diesel prices. China can alter world demand by artificially setting their price low. In other words, the state buys oil at market value but then sets the price. This price, which the government sets, can be artificially low. Considering that the Chinese economy is booming, it made sense for the Chinese government to subsidize their consumers. The fact that they have increased prices for the consumer is good news for U.S. consumers, however, because that means over time there may be more supply for U.S. consumers as Chinese demand decreases slightly. If this did occur, the fundamental price would decrease. The price decline we saw today was mostly speculative, but as we’ve mentioned in these pages in the past, a large amount of the price is due to speculation.
3) Conference Board’s Leading Indicators
The Conference Board’s index of leading indicators rose 0.1% in May, following a similar increase in April. This is important because the Conference Board’s index of leading indicators shows the expected trend over the course of the next few months. The May result bettered the consensus estimates. The last time the index recorded consecutive monthly gains was in September and October 2006. Although GDP has been sluggish, the economy does not appear to have contracted significantly in the first half of 2008 and downside risks have diminished. The recent trend for the leading index supports this contention.
Weights:
Despite the uptick in other indicators, weights remain. One such weight was highlighted in the Philly Fed’s Survey. Specifically, the manufacturing picture from the Philadelphia Federal Reserve stirred some concern that a drop in demand and increases in prices for commodities like oil are buffeting some businesses. If this continues, it will remain a risk to economic growth.
Summary: For the most part, the economic indicators released today were somewhat optimistic. Specifically, we received optimistic news regarding the U.S. labor market, oil prices and the overall outlook—via leading indicators. Nevertheless, concerns remain, as was highlighted in the Philly Fed’s survey. If one believes that the decline in the market over the past few days was somewhat speculative, as I do, these indicators will most likely turn sentiment. I expect this to occur by week’s end. As such, look for the Dow to rebound, jumping well beyond 12,000.
If you are looking for more analysis or client-specific work, please contact me at schmidpat@regionaleconomiccon sultants.com
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