By Rick Glaze
Last week ended with an apprehensive rally in the broad-based markets on Friday. There was a surprisingly good employment report showing the economy created 274,000 jobs in April, more than the 175,000 the street had expected. Bond prices tumbled as investors grew more concerned with thoughts of inflation and the Federal Reserve Board’s continuing to raise interest rates. The yield on the 10-year Treasury note rose to 4.27 percent. The dollar closed up against most currencies, while gold prices fell. Crude ended the week at $50.96.
Stocks have sold off since March, and most major indexes are in negative territory for the year, but quietly there has been a great deal of consolidation in the commodity and raw materials areas. While factors like a strong U.S. dollar could be blamed, the fact that oil and other commodities have risen too far too fast is probably the main reason for the pullback. Many traders view this area as still in a longer-term uptrend.
Every four years the presidential election campaign whips up the atmosphere so much that it is sometimes hard to sort out the reality from the fiction. The winner, it turns out, controls not only the White House but also a vast array of other powerful situations. So the stakes are high, and some of the politicians will say anything to win.
The economic and business environment was dragged through the sifter, and as analysts have pointed out for several quarters, things are relatively stable: There has been no recession for a couple of years, and employment is historically very robust, except for segments of Silicon Valley. Yet trade deficits and a weaker dollar were touted as reasons for great worry.
While the election process has a time horizon of several months, understanding the business cycle takes more patience and a longer view. When the Federal Reserve cuts short-term interest rates it triggers a sequence of events that years later weakens the dollar. A wider trade deficit accompanies the faster growth in the economy. Increasing exports and increasing imports result from strong demand in the United States.
When the Federal Reserve raises rates, the ultimate effect is to strengthen the dollar, narrow the trade gap and slow growth. It’s a long cycle and lasts longer than most senators and congressmen.
Rick Glaze is the president of Los Altos-based Glaze Capital Management.
