The Week ahead

The worst might NOT be over

As more economic data showing the U.S. to be falling into an economic recession becomes revealed, the short term risk to investors will become more pronounced. Bad news, especially with data collected after September 11 could rock or rocket the market. Investors beware.

The market appears to have settled into a trading range after the attacks on the U.S. This is an illusion. The country is spooked and there is a lot of anecdotal evidence that a broad slowdown has been working its way through the economy since before September 11. That event merely accelerated what was already happening.

From super markets to car dealers, there are stories flowing in of people sitting tight and not spending money. This will almost certainly lead to a negative growth quarter in the current quarter which ended yesterday.

If by some miracle there is actually growth in quarter three, September data will be critical to the short term future of the market. Economic data must be anticipated and positions must be protected. This is a very, very, bad time to be on the edge of a margin call.

The key event of the week ahead is the Federal Reserve meeting on Tuesday, October 2. The markets have priced in a 50 basis point drop in rates, leaving the U.S. with its lowest short term rates since the Eisenhower Administration.

What will be looked at is the sentiment in the statement that comes with the rate cut.

If it creates too much fear, look for a stock market plunge. If they decide to cut only 25 basis points, look for a mortgage rates to rise, the bond market to plunge and stocks to take a hit. All of this depends on the statement.

Alan Greenspan has access to more data than you and I. He has a better idea what the true impact of the terrorism is. A couple of weeks of car sales off 25% won't even guarantee a negative quarter. A broader slowdown could be harder on the markets. Right now we still just don't know.

My gut feeling here is that a recession is avoidable. There is a large well of stimulus from tax cuts and the Federal Reserve just waiting push the economy into strong, positive growth. Strong positive growth helps the corporate profit outlook and eventually propels the markets.

Economic growth could resume during the current(forth) quarter. Once the nation gets beyond the attacks and the fear of further attacks the basic economic fundamentals could propel the markets into a strong bull market.

Now is not the time to be all cash. Now is also not the time to be stuck on the edge of a margin call. Please make a note of it.

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Shmuel Protter
investmenttool.com