Friday, September 28, 2007

Consumer Recession but Corporate Boom?

Stocks appear to be taking a breather today. One thing to consider is the sentiment right now. We are near all-time highs for the Dow, and there is a lot more negative commentary out there right now than in July when we were at this point. According to Ken Fisher, this should be taken as a sign to be bullish. But then you have Greenspan talking again, saying recession odds are somewhat higher, but less than 50-50. He obviously has the power to move markets, and I think the market will respond today.

On one hand, you have the idea that as data gets weaker, the more likely we are to see more rate cuts, and this has held stocks up during the past week. But in 2000, the declines continued as the Fed cut rates lower, and lower. So there is a so-called "tipping point" where rate cuts can't save the market. Are we getting to that point? I don't think so. But like Greenspan said, the odds are growing.

Everyone is looking for clues that the housing problems will spill over and hurt overall consumer health. But consumers have been strapped for some time. The cost of everyday items is way up, and the main source of investment and capital gains for the average American, their house, is starting to decline in value. A strong housing market is what has kept the consumer in good shape during the past 5-7 years.

But these issues won't necessarily affect the stock market. The stock market has performed well not because of the the health of the average consumer. It is because money has been cheap and companies are experiencing growth from the global boom. Our economy is much more a global economy than ever before. So there actually is the potential for the US consumer to be in a "recession", while US companies are fairly healthy.

As investors, we have to keep this in mind.

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