When will the stock market stop trading sideways?
On May 10, the Dow Jones industrial average hit 11,642 – roughly 80 points shy of its all-time high of 11,723 in January 2000.
The Dow closed Monday at 11,185.
Creeping inflation, spiking energy prices, slackening housing demand, unrest in the Middle East, a slowing economy and a steep series of interest-rate hikes at the Federal Reserve all bode ill for stocks.
And amid all this uncertainty, money- market accounts are offering nearly 5 percent. So why suffer unknowns in the stock market when you can get a sure thing for doing nothing?
On May 23, I predicted in this column that the stock market would be flat to down this summer, recovering to its early-May level by year-end. I also predicted the Dow would not eclipse its all-time high this year.
So far, I’m dead-on.
Most economists agree the economy is slowing – the debate is over how much. We can always count on turmoil in the Middle East and the resulting higher oil prices. And by now, consumers have got to be feeling the squeeze. Nevertheless, we’re coming to a point in the summer where I may be proved wrong.
“All these worries are already priced into the market,” explained Greg Denewiler, a money manager with Denver- based Denewiler Capital Management. “If anything clears up at all – oil, the Middle East, the housing market – we’re going to get a relief rally.”
I wouldn’t bet on peace in the Middle East, a sharp decline in oil prices or an immediate end to the home-foreclosure crisis. But one factor that could change next week would be the Federal Reserve Bank’s posture on interest-rate hikes.
The Fed has raised its key interest rate 17 consecutive times, from a 46-year-low of 1 percent two years ago to 5.25 percent today. If this trend were to cease, the Dow could pop 200 points or more in a single day’s trading, said Jeff Thredgold, economist for Vectra Bank Colorado.
With the economy slowing and inflation falling under control with it, investors have been expecting rate hikes to cease. But St. Louis Fed President Wil liam Poole recently put odds of another rate hike at 50-50 when the Fed meets again Aug. 8.
“The Fed doesn’t even know what it’s going to do yet,” said Thredgold.
A report on personal income, due out today, and another on employment, due out Friday, may point the way. If these reports are strong, investors may bid up the market, betting the Fed will pass on an 18th consecutive hike, Thredgold said.
In January, Thredgold predicted the Dow would hit 12,000 in 2006. He’s sticking by this prediction, too.
The Dow needs another 815 points for Thredgold to be right. For me to be wrong, the Dow needs to rise about 460 points. I don’t think a Fed change will get us there, but who knows?
More than 60 percent of stock-market trades are made by the proprietary trading desks of big Wall Street firms and hedge-fund managers, said Phil Dow, director of equity strategy for RBC Dain Rauscher in Minneapolis.
“It’s not individuals or institutions driving the market,” he said. “It’s really short-term traders.”
The sentiment of these traders has been resoundingly negative, despite strong corporate earnings and a relatively strong economy, even as it slows.
At the same time, stock-market valuations are getting cheap. The Standard & Poor’s 500 trades for less than 17 times earnings versus a high of more than 62 times at the S&P’s peak in January 2002.
The good news is that because valuations are so low, Dow and other analysts don’t see the market taking a big dive anytime soon. Surprises, said Dow, are likely to be on the upside.
“All you need is a shift in trading sentiment amidst reasonable valuations and you can be up 8 to 10 percent on the year,” Dow said.
The market already was up 8.6 percent for the year when it hit its latest high on May 10. It’s now showing a 4.3 percent gain, year-to-date. So far, money-market investors are doing nearly as well.
Still looks like it’s going to be a sideways summer for the Dow Jones to me.
Al Lewis’ column appears Sundays, Tuesdays and Fridays. Respond to him at denverpostbloghouse.com/lewis, 303-820-1967 or alewis@denverpost.com.
