The themes driving the economic discussions and the markets continue to be the same factors in play that have dominated the past several months. The only episode rivaling the run in commodity prices seems to be the endless presidential primary season and ensuing general election campaign. The exhaustive news coverage of these events can even cause the most fascinated observer to become weary. Thankfully (and assuming there will be no McCain v. Obama Supreme Court coup de grâce), the presidential race will come to an end this fall, while the duration of the bull-run in commodities is a bit less predictable.
The increasing cost of crude oil and gasoline has remained foremost in the commodity discussion as prices at the pump have eclipsed the $4 per gallon level in many U.S. cities. Crude oil prices have continued to soar from $96.29/barrel on December 31, 2007 to $127.78/barrel on May 30, 2008, which is actually down a few dollars from the peak during the month of May. Congress has looked into whether there are any manipulative practices influencing the price of oil on the financial markets, and it appears that they do see speculation, but nothing that appears to be widespread illegal manipulation of prices.
Consumer confidence recently registered at the lowest levels since the previous President Bush was in the White House. The weak housing prices, rising energy costs, and a shaky job market are all adding to consumer jitters. Statistical evidence of a weaker economy and a cautious consumer oftentimes has been a harbinger of prosperous moves higher by the equity markets. In fact, since mid March through the end of May, we have already seen the NASDAQ rally over 15% and the S&P 500 rebound by roughly 10%.
The unemployment data for May showed an unexpected spike as the jobless rate increased from 5.0% to 5.5% in one month. There are many economists who have offered an explanation for the unusual monthly spike. One reason is that it is estimated that the job market needs to produce 100,000 jobs each month to match the additions to the labor force. The past five months of job data have shown negative job growth without much of a rise in the unemployment rate, so the lag in the rise of unemployment could have shown up in the data this month. Others have challenged the data and the seasonal adjustments, attributing the rise to the end of the school year, which added thousands of teenagers and college graduates into the labor force.
The always anticipated sell-off in May did not materialize this year. The NASDAQ was a notable outperformer for the month of May, gaining 4.6% along with small cap stocks, as the Russell 2000 also rose by 4.6% during the month of May. The S&P 500 was up 1.3%, while the Dow Jones Industrial Average lost 1.2% for the month. All of these measures are negative for the year while rebounding since March. The Dow Industrials and S&P 500 are off 3.8% for all of 2008, the NASDAQ, despite its recent strong performance, is down 4.6% for the year, and the Russell 2000 is only off 1.8% for the year.
In the U.S., we are, on aggregate, larger consumers of commodities as opposed to producers of these valuable resources. Several economies have thrived, in part, due to the rising prices paid for those resources. The
International markets have been mixed for the year. As we have said, the developed economies, which are larger consumers of natural resources, have struggled compared to the other markets. The developed international market as measured by a popular ETF has declined 3% for the year while the most widely followed emerging markets ETF has been slightly negative for the year by 0.5%. China’s and India’s stock markets have struggled this year while some of the other foreign markets have done better. For the year, the Latin American ETF has produced a gain of 20.2%, while the Canadian ETF has added 8%, and finally an ETF focusing on Russia has gained 10.4% through May 31st.
Financials continued their struggles, falling 6.95% during the month of May and extending the year-to-date losses to 13.77%. Many analysts had believed that the Bear Stearns bailout would mark the bottom for the financials as fear reached a peak. Unfortunately for many investors, numerous financial stocks have eclipsed the lows of March after rebounding temporarily in April. The Federal Reserve actions have had a positive impact on the functioning of credit markets; however, these improvements have had surprisingly little positive impact on financial stocks.
Despite continued volatility in the markets, the major averages and indices have not breached the lows reached during January and tested in March. Some market technicians (those who use charts and trends as proxy for investor psychology) have opined that it’s likely the market has seen the worst. We are loathe to suggest with any certainty that we have, indeed, seen the worst, but the market does seem to be signaling that the economy may stabilize and begin to strengthen towards the end of the year.
The rest of 2008 is sure to be filled with political uncertainty and posturing, and uncertainty is not something the financial markets typically embrace. However, there is some historical evidence that the uncertainty, fear, or even exuberance related to political leadership changes are frequently exaggerated. We’re confident that the U.S. economy and financial markets will have success in the future regardless of what change the 2008 election brings.
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