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It's been more of a bounce than a rally. As of the close on June 23, the Dow Jones Industrial Average ($INDU) was up 3.15% from the June 13 intraday low. The S&P 500's ($INX) stock index was up 2.1% from its low from the most recent downturn. And the Nasdaq Composite Index ($COMPX) was up 2.7%. These modest gains have come on relatively low trading volumes: In a rally with some staying power, volume will rise along with prices as climbing prices draw more money in from the sidelines. That hasn't happened so far in this upward move, increasing the odds that it's just a temporary bounce.
Still, even a very modest bounce is better than a continuation of the correction that ruled the equity markets for the last half of May and the first half of June. And some stocks, typically the very ones that took the biggest hits in the May correction got bigger than index-sized bounces in June. Australian mining stock BHP Billiton (BHP, news, msgs) fell 26% during the correction and then bounced 11%. Coal mining stock Consol Energy (CNX, news, msgs) dropped 24% and then bounced 20%. Gold mining stock Glamis Gold (GLG, news, msgs) plunged 29% and then bounced 16%.
Sell so you can buy later
If I'm right and this is a bounce and not a rally, you should be selling into it. Not panic selling. Not wholesale selling. There's no need to liquidate your portfolio.But careful, selective selling would give you some cash for buying at the bottom that's still to come in August or September, I believe, and allow you to reshape your portfolio (See my two columns on The Pessimist's Portfolio: "A portfolio for pessimists" and "5 stocks for the pessimist in you") for the possibility that the Federal Reserve and the world's other central bankers will indeed engineer a slowdown in global economic growth in 2007.
It's not surprising that the recent bounce has been so anemic. A round of very well-coordinated and very well-publicized speeches by members of the Federal Reserve from Chairman Ben Bernanke to the governors of the regional reserve banks has put the fear of another round of rate hikes back into the financial markets. Back on May 10, after the Federal Reserve's Open Market Committee raised short-term interest rates another quarter of a percentage point to 5%, a majority of investors believed in "One and done": Another rate hike at the Federal Reserve's meeting this week -- the announcement will come Thursday -- would be the last before the central bank paused to see how much the economy had slowed under the pressure of previous interest-rate increases.
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That was before Fed officials started talking about the need for further vigilance on inflation, how the current inflation rate was outside their comfort zone, about signs that energy costs were finally filtering through into end prices.
Odds, measured by the price of Fed funds futures, of an interest-rate increase at the June meeting gradually climbed from 50% at the end of May to 100% today. The Fed meeting will be held Wednesday and Thursday. Odds for another quarter-point increase in interest rates at the Fed's Aug. 8 meeting climbed above 60%. On Friday, the odds of an August hike climbed to 66%, up from 62% the day before.
And, in a sign of just how effectively the Federal Reserve has spooked the financial markets, the odds of a half-percentage-point interest-rate increase on Thursday climbed to 12% on June 23 from just about zero earlier in the month. And rather than "one and done," market sentiment is shifting toward "three and maybe more." The Fed funds futures market is now pricing in a 23% chance of a third rate increase -- one more after August -- in 2006.
A 6% fed funds rate
Wall Street investment houses have joined the three-peat party. Barclays Capital, JPMorgan and Credit Suisse all now predict that short-term interest rates will peak at 6% either in late 2006 or early 2007.Rate this Article
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