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July 5, 2002
Big movements in markets on almost-holiday days, like today, shouldn't be over-emphasized. The big traders are at the beach, flicking sand at weaker wannabes, and snickering at Martha Stewart's cabana.
So, temper exuberance at today's 300-plus-point surge in the Dow.
Another holiday element in today's lovely rally: relief at the absence of terrorist attack (the one shooter at LAX may have been, but post-9/11, onesy-twosy stuff we can handle). Yesterday's celebrations put on a modest display of national courage: there was no report, not from any city or town, of reduced attendance at vulnerable mass gatherings.
A relief-rally tell-tale: pre-4th fear had driven the 10-year T-note yield down to 4.72%; today it's back to 4.86%, pushing mortgages back toward 6.75%.
For all the false effects of holiday and relief, this jump in stocks is beneficial beyond wealth restored: it is a warning to short-sellers. In June, it was too easy to sell short, which made it too dangerous to buy, which is a prescription for a self-reinforcing downward spiral (the obverse of the bubble years, when no one dared to sell short). If the market can maintain this rebound from the September '01 low, the resulting "double bottom" will keep the shorts under control.
The economic data this week were good, even very good. In today's employment report for June, payrolls increased by a negligible 36,000 jobs, but a crucial turnaround measure, "hours worked," posted the largest monthly gain in a dozen years. Businesses may not be hiring yet, but if they are suddenly asking and paying for overtime, it shouldn't be long before they begin to hire.
The Institute for Supply Management's indices have been the best guides to economic activity (and to changes in long-term interest rates) for a generation. A fifty reading indicates a breakeven economy, and an index level near 60 generally precipitates a rate hike from the Fed: the ISM's indices have been in the 55-60 range for three straight months.
One cautionary item: the mortgage insurer MGIC in its July 1st Housing Market Condition guide for underwriters noted fifteen "softening" regions versus only four "improving" ones (out of 73 areas nationwide).
Today's rally aside, it has been an awful month for stocks. Yet, there is no sign that the "wealth effect" is running in reverse.
There are good reasons…. One of the central strengths in the economy has been the Boomers drive to make money for retirement; having lost their shirts in the bubble, their need to work and save is at least as strong as before.
Another reason for economic resilience: the workers most hurt in last year's downturn were those in bubble industries. Very much unlike other recessions, today's unemployed -- bubble-workers -- are among the nation's best-educated, motivated, and work-experienced. They know how to set the alarm clock. They are rapidly re-deploying, in trade, or out. Many a company unable to find or afford a software engineer two years ago, now can.
I'd love to find a way around it some day, but there doesn't seem to be any substitute for hard work… not even the easiest Fed in 40 years.
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