Editor’s note: Marc Leavy,CFP? is a regular financial columnist for Business Reform Magazine, the leading Christian business magazine with over 100,000 readers. Each issue features practical advice on operating successfully in business while glorifying God.
There is a perversity about rate cuts. The Fed doesn’t usually cut rates unless they think there is a problem with the economy. Thankfully, they only cut rates by 25 basis points. (A basis point is one hundredth of a percent.) The fed has indicated it thinks the economy is in good shape, so other rationales for the rate cut may have been a block against the deflation bugaboo and the fact the European nations are cutting rates and we are doing our part for the global economy. (We decided to take one for the team.) The deflation worries seem to have largely abated and the last cut may have sounded the deflationary death knell.
Good news on the employment front sent the markets rallying but GDP growth threw some water on the fire. The Labor Department stated new claims for unemployment benefits fell by a seasonally adjusted 22,000 to a three-month low of 404,000. Below 400,000 is the unemployment comfort zone for economists. “The worst of the layoffs may be behind us,” said Mark Vitner, economist at Wachovia. The national unemployment rate is around 6 percent which is still the 40 year average. Interest rates are at their 45-year low and unemployment is at its 40-year average. Back to the fifties where everything old is new again.
The Commerce Department announced the first quarter GDP rose at an annual rate of 1.4 percent, which was lower than the 1.9 percent estimated. One of the reasons GDP was down is due to business reluctance to build up inventories. Business has been reluctant to increase any capital spending until profits become tangible. Hopefully, business sees a brighter day ahead and will get into the game and begin spending money on capital expenditures. Not much is expected for the second quarter but the recent tax cuts and rate reductions are fueling expectations for the second half of the year. Some economists predict growth will double to around 3.5 percent to 4 percent rate “The economy should gain traction in the second half of this year,” reports Mark Zandi, chief economist at Economy.com.
“Investors are looking forward to the end of the quarter and dreading the preannouncement season,” said Michael Palazzi, managing director of equity trading at SG Cowen Securities. Preannouncement season is when companies warn Wall Street about their earnings. There is also the temptation to play an expectation game by hinting earnings may be so good, only so companies can come out with “better than expected” news.
Sectors of the economy that seem strong from a technical and fundamental standpoint are drug stores, pharmaceuticals, growth airlines, and restaurants. These sectors look good now and should continue to look good going forward.
I hope this economy parallels the fifties not only in interest rates but in sustained economic growth with a rebuilding of manufacturing and infrastructure.
Marc Leavy, CFP? is a Certified Financial Planner. Principled Investing teaches Solomon’s principles of investing and offers wisdom regarding comprehensive financial planning for a fee. You may contact Marc at [email protected] or visit www.principledinvesting.org.
