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March 9, 2001
Some days, nobody is happy.
In a break from the long-standing pattern, the stock market fell apart today (again), and long term interest rates rose. Mortgage rates finished the week near 7.125% for low-fee packages.
All this year, and last, stock market weakness tended to cause frightened money to go to bonds in anticipation of deepening weakness in the economy. The catalyst for change was this morning's release of employment data for February. As soon as " -- FEB PAYROLLS GAIN 135,000 -- WAGES UP .5% -- JAN REV 224,000 -- " scrolled across screens, bonds began to slide, and slid all morning.
These payroll numbers are consistent with a slower economy than last year, but not with recession. On these numbers, you can't make the case that there is any further economic slowdown underway at all -- we're poking along at maybe 2% GDP growth.
So, if there is no dangerous slowing underway, and wages are growing at a strong 6+% annualized rate, it's very hard to believe that the Fed is going to ease aggressively. We're still likely to get a .50% cut in the Fed funds rate on March 20, but we knew that. Future big cuts are no longer a sure thing, and all that euphoric drivel about inter-meeting slashes... gone. After March 20, the Fed may take no more than a few .25% nibbles.
Nobody is happy.
Bonds aren't happy because there's no recession, and a still-tight job market and fast wage growth may be trouble.
Stocks aren't happy because the Fed isn't going to cut rates much.
But, why won't unhappy stocks hurt the economy in a reverse-wealth-effect feedback loop?
Stocks are unhappy, but not a disaster. All the broad market averages are within their 2001 trading bands, and even the pathetic Nasdaq is holding 2000. The media drumbeat at the dot-com funerals and drive-by voyeurism at tele-tech crack-ups makes it all look worse than it is.
This week's accident victims: Intel, Yahoo, and Cisco (again). Nobody knows where the bottom is for tech issues: if they are to be valued by traditional measures, they are still way overvalued as a group (even E-loan, all the way up to $1.41 from its 2001 low at $0.38).
However, there is a tremendous amount of cash piling up in mutual funds, and sooner or later it's going to be spent on stocks. The resulting rally, no matter how modest will tend to keep the reverse-wealth-effect under control.
Some of that yield-hungry cash will slop over into mortgages (as evidenced by this week's surprising drop in Jumbo rates), but a deep decline in mortgage rates remains a bad bet unless the economy renews its weakness.
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