The Party Rolls On; Until the Next Correction
posted on: November 02, 2007
October paid off once
again for the optimists. Red ink was nowhere to be found among the
major asset classes, as our table below shows. Even the battered REIT market posted a handsome gain last month.
What's extraordinary here is the persistence of bull markets in
everything. In fact, it's downright amazing. On a 1-year basis,
everything's up, and the same can be said when reviewing longer term
records as well. The lone case of loss shows up only in REITs in the
year-to-date column. But that's hardly a calamity, given the potent
rise in the asset class for the better part of the past seven-plus
Meanwhile, the Federal Reserve is doing what it can to keep the
bulls happy. Wednesday's 1/4 point cut in Fed funds received a warm
welcome in the stock market. The S&P 500 rallied 1.2% on Wednesday,
reaffirming once again, that the equity crowd loves liquidity.
The sentiment's a bit more complicated in the bond market. The
initial reaction to the Fed's cut among the fixed-income set was to
sell first, and ask questions later. As a result, the yield on the
benchmark 10-year Treasury popped by the close of Wednesday's trading,
rising to 4.48%, which is the the highest its been in nearly two weeks.
But no one should confuse the 10-year's yield as excessive. A 4.48%
rate is roughly the lowest in the past two years.
The future, of course, relies more than a little on consumer
spending habits in the coming months. But here too optimism springs
eternal, at least as it looks from Thursday morning's update on
personal income and spending for September. On Thursday, the Bureau of
Economic Analysis reported
that personal income rose 0.4% in September, which is unchanged from
the August rate. Disposable personal income, for example, what's left
over after Joe Sixpack pays the bills, also rose by 0.4% in September,
although that was down slightly from August's 0.5%.
Speaking of spending, Joe continued to embrace the consuming side of
his personality in September as personal consumption expenditures rose
by 0.3%. Not bad, although that's notably down from August's 0.5% gain.
A warning of trouble to come? Perhaps, although predictions of a sharp,
sustainable pullback in consumer spending have been rolling around for
years. To date, Joe's proven the pessimists wrong, suggesting that
consumers can keep spending for longer than prudent bears can afford to
remain consistently anxious. The latest numbers suggest no less.
The markets confirm the trend. As our chart above reminds, there's been no reward for anything other than embracing risk.
Alas, bull markets in everything at this late date are increasingly
worrisome, even if the rear-view mirror suggests otherwise. Oil, to
cite an increasingly obvious example, moved above $96 a barrel on
Thursday, to cite one example. The longer the party goes on in
everything, the bigger the potential correction in something will be.
But for the moment, the party rolls on.