By Rick Glaze

A surge in oil prices led stocks and bond yields lower last week. The Nasdaq composite finished 1.8 percent lower while the Dow Jones Industrial Average of 30 large companies was lower by 3.1 percent and the S&P 500 index lost 2.1 percent. The largest tech stocks in the Valley followed the market’s trend. A barrel of oil traded over $60 before settling in at $59.84 for the week.

Continuing to prove many of the experts wrong, the bond market rose and yields decreased. The yield on the 10-year Treasury Bond ended the week at 3.92 percent. The bond price moves inversely to the yield, so the price of a bond goes higher as the yield moves lower. Gold lost ground and the dollar fell against most major currencies.

Alan Greenspan warned against trade sanctions in the form of a tariff. There is a move in Congress to tax Chinese imports more than 27 percent. The Federal Reserve Board chief cautioned that this kind of protectionism would not protect U.S. jobs, but could be destructive and possibly inflationary. A similar tariff in the late 1920s is given credit for ushering in the Great Depression. It would seem that members of Congress could learn from history.

The economy is the driving force for the stock market, and the Fed uses short-term interest rates and regulates money supply to control the economy. Growth that is too fast may ignite inflation, which causes prices of goods and services to rise.

Since President Bush’s tax cuts in 2003, the economy has grown at an average of 4.4 percent, which is quite healthy, and inflation has remained low. With short rates and oil prices higher, the economy should slow to the 3.5 percent rate and inflation could be expected to hover around the 2 percent area - all in all very healthy.

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Rick Glaze is the president of Glaze Capital Management of Los Altos and is a registered representative of First Allied Securities Inc.