Recession? Yes or No? . . . Why Don't We Really Know?
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You would think with all the modern technology we have to collect and disseminate data that we would know whether or not we are in a recession. The fact is we don't really know. We also don't really know whether we have enough inflation in the economy that we will see the Federal Reserve raise interest rates to slow things down. Of course if we had definitive knowledge about these things, the job of investing would be much simpler.
Party to this lack of definitive knowledge is the dollar. For much of the last year the dollar has been beaten up, falling to historic lows to the Euro and near lows to the yen. Yet in the face of two weeks of turmoil in the market, which saw shares of financial stocks take a beating along with some other sectors of the market, the dollar had its best week ending Friday, June 13th in more than three years. A combination of anti-inflation rhetoric from U.S. policy makers and signs of strain in the European Union contributed to the move.
The tough talk from the Federal Reserve convinced investors that an increase in U.S. interest rates is imminent, possibly as soon as August. That sent the yield on the two-year Treasury note surging and its price tumbling (as interest rates rise, prices fall on fixed income investments). The higher interest rates often improve the currency because they give investors greater incentive to hold interest-bearing instruments denominated in that currency. Late Friday, one euro bought $1.5363, down from $1.5769 a week earlier. That doesn't seem like a lot, but in percentage terms it's a whole 2.57% If the Dow Jones were to see a similar change you would be looking at 316 points!
The stronger dollar will make it less expensive to feed our addiction, which of course is oil. Indeed, oil fell $1.88 to $134.86 a barrel on Friday. This was not only due to the strength of the dollar, but also to a report that Saudi Arabia, the world's largest petroleum exporter, is considering another increase in its oil output. If the Saudi's follow through on the report, it would put their production at 10 million barrels a day, up from 9.45 million barrels. That's a lot of oil!
The market responded to these events by gaining 165.77 points on Friday, putting the Dow Jones Industrial Average at 12307.35. This was not without considerable volatility during the week. Friday's relief was aided by May's consumer prices which, excluding food and energy, came in as expected. Why the report comes in excluding food and energy, I can't explain. Probably because they are so volatile. Yet they are the key commodities that most effect us average consumers.
The Fed will have to be very careful about raising any interest rates. The University of Michigan consumer-sentiment index was reported last week at a 28 year low. Add to this all of the unknowns regarding the country's political future and investors will have to stay on their toes.
In the meantime, be sure to keep your risk within your tolerance and stay ahead of inflation.
I invite your questions.
Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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Jerry Cole - Retirement, Investment |
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