|
Global markets panic - U.S. economy forecast moderate
June 17, 2006
The markets have continued their panicked sell off, including global stock indices, gold and oil. Investors are putting their proceeds into cash, causing the dollar to strengthen from 110 yen in mid May to 115 yen on June 13. It also strengthened against the Euro in the last few days: on June 5 you needed $1.29 to equal one Euro, but only $1.25 on June 13.
Stocks prices fell from their recent highs, including:
- Dow Jones closed at 10,706, down 8% from its May 10 high of 11,642.65;
- London’s FTSE closed at 5,519.6, down 10% from its April 21 high of 6,132.7;
- Germany’s DAX closed at 5,292.1, down 14% from its May 9 high of 6,140.72;
- Japan’s Nikkei closed at 14,218, down 19% from its April 7 high of 17,563.37;
- Hong Kong’s Hang Seng closed at 15,234, down 12% from its May 8 high of 17,301.
Gold fell to 566.80 an ounce, down 23% from its May 12 high of $732.
Oil fell to $68.56 a barrel, from its late April high of $72 per barrel for light sweet crude.
However, the American economy is still relatively healthy. According to the latest economic forecast released last week by the Council of Economic Advisors, GDP growth will be at a healthy 3.6 rate for the rest of the year, and moderate to a sustainable 3% growth rate next year. Unemployment will remain at a low 4.7%, with an increase of jobs at 156,000 per month. Inflation is forecast to remain at about 3% for the rest of the year, thereafter declining to 2.4%
What It Means:
The market’s decline is less a function of an underlying economic tailspin, and more a function of a “perfect storm” that consists of:
- Investors expected a 10% market correction, creating a self-fulfilling prophecy.
- Investors expecting the traditional summer market slowdown;
- Hedge funds frantically selling positions to gain cash to cover remaining positions to further stem their losses.
Action Steps:
Although no one knows for sure, it is likely the market will respond to economic fundamentals and return to a less volatile pace, possibly by early fall. Hopefully, you have followed the action steps advised over the last few weeks and reallocated your portfolio to safer funds. If not, it is still a good idea to call your financial planner, and make sure you are well-diversified. This is always the best way to gain the most return, with the least risk over the long haul.
Source:
Gold Prices - Comex division of the New York Mercantile Exchange;
Oil Prices - Brent oil spot price, EIA, DOE;
Economic Forecast - A joint report by the Council of Economic Advisors, the Treasury and the Office of Management and Budget, June 8, 2006.
|
