Tuesday, June 12, 2007

The Market, She Be Confused

Roughly a year ago, in one of the earlier pieces on this blog, , "The Market, She Be Angry...," I commented on how analysts so often, mistakenly, anthropomorphize capital markets.

In part, I wrote,

"Despite the signs of investors waffling on the economy's health, Brian Wesbury commented that average mortgage interest rates are still a full point lower than they were during the last expansion. And the Fed is moving to ensure low, long-term inflation. Thus, there's no reason to expect the economy to suddenly sieze up and slide into a recession."

And that paragraph roughly fits today's market, too. This time, the S&P500 Index is down recently due to investor worries about inflation.

In the past week and a half, inflation worries have trimmed roughly 3 percentage points from the Index's year-to-date return, driving down to about 5.3%.

But, wait. Weren't investors worried only two months ago about global economic growth and weak earnings? Wasn't the last earnings announcement season a big surprise, accounting for the Index's more than 8 percentage points of gain in April and May?

So, in the space of something like 60 days, we apparently have investors moving from worries about too little growth, to worries about too much growth, too little liquidity, and rising inflation.

Which is it? Or is it even either one? Is it simply the usual case of many inept pundits and analysts misleading equally-naive investors?

That would be my bet. More heat than light, again. In fact, in each of the past three years, pundits have called a near-recession for later in the year, only to see investors push the index up by November, as low-inflation growth was confirmed by the fourth quarter.

What is disconcerting is how much of this misinterpretation of economic signals is repetitive, and, yet, goes unreported as such. The much heralded recessions have not materialized. Now, the much heralded inverted yield curve is normal, rather than inverted.

So, where's the celebration, now that the non-inverted yield curve should be signaling no recession? Instead, the pundits frown, note the possibility of a Fed rate hike, or less global liquidity with higher rates, and, thus, slowing growth.....and a recession.

I think we're seeing more confusion on the part of most market watchers, pundits, analysts, talking heads, etc. And even retired Fed Chairmen, albeit one who has a spotty record on forecasting equity prices.

When I see this amount of baseless, rapid change of thinking in the equity investor base, I pay it little heed for long term equity market trends.

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