Just Downright Ugly!

The only real good news for this quarter, for those of you who qualified, is that you hopefully received, or are about to receive, your economic stimulus check by now! With a little luck, based on the amount you received you were able to fill that SUV up with a tank of gas, buy some groceries and maybe even take in a movie. As for the groceries, hope you were able to splurge on corn for that 4th of July barbecue since it is up year to year by 47%!

So we as consumers have our economic challenges and Wall Street has certainly had its own fair share for not only the past quarter, but the entire first six months of this year. There is no mistaking the fact that it has been an unforgiving market up to this time. As inferred above, the economy has been dealing with a full plate of economic issues such as a weak dollar, high energy and food costs, oil at record levels, a credit crunch, and a depressed housing market. That was just too much for the investment markets to digest and the result was the worst first half performance in six years.

The quarter results found the Dow Jones Industrial Average falling 7.4% and on a year to date basis down 14.4%. For this index it also represented the first time since the late 1970’s that the Dow has been negative for three consecutive quarters. The Nasdaq somehow managed to squeeze out a 0.6% gain for the quarter, but nevertheless holds onto a 13.5% decline for the first half of the year. Rounding out the other major index, the S&P 500, it fell by 3.2% for the quarter and also has a double digit decline of 12.8% on a year to date basis.

So what’s ahead for the second half of the year? Economic indications are that the U.S. economy is most likely to remain sluggish. Realistically, we will be anchored to high energy costs, credit market stress, and a weak housing sector. The subprime credit crisis still continues to unfold as we hear of billions of dollars in loans yet being written down every month. There are a number of economists who feel that we need to see some recovery in the housing sector before we can expect to see the economy begin its recovery.

There seems to be a debate between Wall Street and Washington over whether or not we are dealing with inflation. We all know that numbers can often be "interpreted" in different ways and inflation data is no different. The tendency lately is to report results as ex (without) food and energy, leaving a core inflation number that is not too intimidating. Yet for the consumer, those ex items of food and energy are playing havoc with the family budget. The Federal Reserve finds itself caught up between the proverbial rock and a hard place. They are highly conscious of the inflationary pressures being exerted by the spiraling energy and food prices. Yet it appears that their hands are at least temporarily tied. To raise interest rates only increases the probability of shutting down any hope of stimulating growth in the economy. Yet, at some point in the next few months the Fed will need to decide what is apparently the greater risk, slowing growth or combating inflation.

There are a lot of market analysts, as well as economists, who feel at this time that a raise in interest rates would be the better prescription. The reason being that a raise in interest rates should help to strengthen the U.S. dollar on the world markets. A stronger dollar would be a step in the right direction to help in bringing down the price of oil, which is one of the biggest thorns in effecting our economy.

Given the current state of the markets and economy we have little choice but to be presciently bearish as we look at the second half of the year. In the meantime, in case you didn’t spend that entire rebate check yet, save a few dollars and do go to that movie. Have a Wonderful Summer!

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