For the past six weeks the market has been falling over concern about terrorism, interest rates and corporate earnings. Last week an increase in oil prices and a decrease in jobs put a whammy on the market.
Since Jan. 1, the Dow industrials have lost 6.1 percent, the Nasdaq composite is down 11.33 percent, and the Town Crier index is down 17.6 percent. A $50,000 investment in Silicon Valley stocks listed in the Town Crier index on Jan. 1 would have lost $8,800.
This week the Federal Reserve will be the center of attention, with its decision on the interest rate. Early last week we expected a rate hike, but after last Friday’s data the Fed may hold short-term rates steady amid worries the recovery is faltering.
At the heart of it all: oil, it seeps into your wallet. Oil prices hit 21-year highs last week amid worries about terrorism, the war in Iraq, and the troubles of Russia’s largest producer, Yukos.
You don’t get many clearer lessons in economics than this: When consumers have to spend more on gasoline, they spend less on everything else, hurting the overall growth.
Economists estimate a $10-a-barrel increase in the price of crude can slow U.S. economic growth by a quarter to a half percentage point for a couple of years. That translates into hundreds of thousands of jobs and billions of dollars in spending power.
Oil has been fidgeting around $44 a barrel, and some analysts said it could reach $50 a barrel before heading lower.
The economy’s “soft spot,” as described by Federal Reserve Board Chairman Alan Greenspan, could turn out to be a trend instead of an aberration.
If oil stays at these levels, the expansion could be delayed or derailed, setting back hopes for some real growth in payrolls and income for ordinary working folks.
Greenspan is between a rock and a hard place.
If he raises rates now it would send a signal bankers are prepared to keep inflation from accelerating, but it would come at the cost of slowing the economy and job growth.
By keeping the rates constant he could help the economy generate more growth, and the market would rise on the news.
Several economists have stated that crude-oil prices are more about market psychology than fundamental economics. This is occurring even as more oil is pumped and more oil comes to the United States for storage. In a sense, it doesn’t matter, because in the short run most Americans have no alternative but to pay the price at the pump. The effects of high oil prices are real.
On the bright side, stocks have traditionally been viewed as the best investment a person can afford to tie up for at least five years. Stocks almost always beat bonds and cash over that length of time.
Unlike bonds and cash, stocks tend to automatically compensate for inflation as companies raise prices for products and services and stocks benefit from improvements in worker productivity. Bonds and cash don’t.
