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Could the Market’s Inflation Worries Premature?

Investor’s first read      - Brooksie’s edge before the openFriday, March 23, 2012        9:06 a.m. ETDJIA: 13,046.14        S&P 500:  1392.78From time to time, it

Investor’s first read      – Brooksie’s edge before the open

Friday, March 23, 2012        9:06 a.m. ET

DJIA: 13,046.14        S&P 500:  1392.78

From time to time, it helps to step back far enough to see  how much impact old “worries”  are still impacting  stock prices and  how big a role “new” worries stand to play in the direction of the market.

For the time being, a European meltdown is off Page One, as is a pre-emptive military strike by someone on Iran’s nuclear development program. Both can resurface, though.

Worries about a slowdown in European, Chinese and Brazilian economies are now escalating to worries about how deep these pullbacks can get and how much of an impact they may have on the U.S. economy.

There is also now chatter about escalating inflation.  St. Louis Federal Reserve Bank President James Bullard warned yesterday that  unless the U.S. and other leading nations exit their “ultra-easy” monetary policies in a timely manner, a high rate of inflation will persist for many years.

In spite of what the Fed has said about interest rates remaining low until 2014, rates may start rising in 2013, Bullard says.

That would seriously jolt long-term bond investors, who already may be seeing portfolio losses.

Initially, a rise in the rate of inflation and interest rates would also jolt investors in the stock market, but bull markets have co-existed with increases in both rates in the past.

The stock market gets hit when the Fed ratchets up its  effort  to cool off  runaway inflation and a hot economy that stands to drive the cost of living yet higher.

Undoubtedly, the stock market will take a hit when the Fed moves to raise interest rates, and  most likely in advance of this decision.

Worries about this happening, appear to be surfacing now, but realistically, global economies are barely able to eek out a modest recovery after a near global meltdown, so these worries are premature.

TODAY: A tumbling stock market found buyers at my support levels (DJIA: 13,020, S&P 500: 1377) yesterday, but may test them again today. But a  good New Home Sales report at 10 o’clock may be able to goose stock prices prompting a rise to DJIA  13,126 (S&P 500: 1402).

Based on current concerns, I see downside risk over the next week or two in the area of DJIA 12,955 (S&P 500: 1371) and even the potential for a sharp rally.


MONDAY (10 a.m.):  Housing Market Index:  The National Association of Home Builders/ Well Fargo (WFC) Housing Market Index (HMI) held in March at its highest level in four years following five consecutive months of gains.

TUESDAY (8:30 a.m.) February  Housing Starts held to an annual rate of 698,000 a smidge below industry projections.  This compares with a rate of 609,000 a year ago. At its peak in 2005, the annual rate of starts was 2.07 million, leaving plenty of room for further increase.

WEDNESDAY  (10 a.m.) Existing Home Sales – February held its ground near a two-year high, dropping 0.9% to an annual rate of 4.59 million.  Tanuary and February mark the strongest start since 2007. Nevertheless, the numbe of existing homes on the market increased by 100,000 to 2.43 million, which at the cureent pace would take 6.4 months to sell, up from 6 months in January. The median price of an existing home is now $156,100.


( 8:30) – Jobless Claims for the March 17 week came  in at a decrease of 5,000  to 348,000, bringing the 4-week moving average down to 355,000 well below the 400,000 the doomsters barked must be beaten or the recovery was dead.

(10 a.m.) FHFA House Price Index – January home prices fell  0.8%, the least in more than two years. The FHFA U.S. House Price Index was 19.2% below its April 2007 peak

(10: a.m.) Leading Indicators – rose 0.7% in February vs a projection of  plus 0.6%.  Eight of the ten indicators in the index rose.January’s index  was up a strong 0.4%.

FRIDAY (10 .a.m.)   New Home Sales – declined 0.9% in January after a sharp increase in December. The median house price edged up to $217,100 in January.

George  Brooks


The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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