As January ended and a new month began, it appeared I was not alone in already having thrown off some New Year’s resolutions. The financial markets have been without resolve.
Stock, bond and commodity markets lack direction. The stock market is off to a good start, rising about 4 percent for the year, but still remains 15 percent below its peak in 2008. Bonds and commodities, meanwhile, are in a tight trading range.
The benchmark 10-year U.S. Treasury bond has bounced between 3 and 3.5 percent for nearly two months now, and after rising steadily throughout the fall the Dow Jones-UBS Commodity Futures Index has stayed between 155 and 165 since early December. Against all other major currencies, the U.S. dollar remains where it was in mid-November.
The lack of direction is surprising given more upbeat news on the economy.
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In its first estimate for the fourth quarter of 2010, the U.S. Commerce Department said the economy grew at an inflation-adjusted rate of 3.2 percent, up from 2.6 percent for the third quarter. The report cited increases in sectors of the economy that investors should deem positive — rising consumer expenditures (4.4 percent increase), exports (8.5 percent increase), and nonresidential fixed investment (also up 4.4 percent). Increases in all of these areas should bode well for corporate profits and employment, but the stock market fell immediately after the report.
Local Idaho companies should feel the effects of improving economic conditions. CNBC’s Jim Cramer recently touted Boise-based Micron Technology’s lead in NAND flash technology, which is used in the ever-more-popular tablet devices like Apple’s iPad. Along with more reports on how tablet sales are outpacing personal computers, Cramer’s comments sent Micron’s stock price soaring. Despite the run-up, the stock remains below levels seen just last year and still well off prices of 2008.
If all is well on the economic front, what is holding back the financial markets?
A possible answer is continued uncertainty over fiscal and monetary policy. The recession may be over, but the costs of the government’s efforts to combat the downturn are likely to be with us a long time.
In his State of the Union speech, President Obama opened the door again to the prospect of rising taxes. He first said, “Thanks to the tax cuts we passed, Americans’ paychecks are a little bigger today.” But later he added that we “can’t afford a permanent extension of the tax cuts for the wealthiest” Even though the president called for tax reform, the question of individual tax rates, which affect small-businesses decisions, remains up in the air.
The president also called for new spending initiatives while also asking for real deficit reduction. He proposed a five-year freeze on domestic spending but also asked for more spending on alternative energy, teachers, and other projects he believes will help us “win the future.”
State fiscal policy is also uncertain. The Associated Press reports that Idaho House Majority Leader Scott Bedke believes our fiscal deficit could reach $185 million as tax revenue falls below projections. The Idaho Division of Financial Management reported that income taxes for December were more than $7 million below forecast.
The path of monetary policy is also unclear. After its January meeting, the Federal Open Market Committee of the Federal Reserve announced that it sees the economy recovering but at an “insufficient” rate. The committee said it will continue to “monitor the economic outlook and financial developments,” but gave no indication as to when interest rates will come off the near-zero level or when the unprecedented purchases of Treasury securities will stop.
With no end in sight to loose monetary policy and continued weak fiscal positions at both the federal and state level, the financial markets will lack direction.
When it comes to resolutions, there is always next year.
Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. Reach him at prcrabb@NNU.edu.