What the bookies are saying about GDP, the Fed, and the upcoming recession

Posted Oct 27th 2006 11:45AM by Douglas S. Roberts
Filed under: Major Movement, Indices, Market Matters

As the GDP numbers were released this morning, some people are saying that the market is heading for a downturn and a recession. However, let's take a look at the facts. The GDP is still growing, but at a reduced rate because of the slump in the housing sector. The unemployment rate is still steady at low levels.

As long as people can continue to make payments, they will not abandon their homes. However, speculators are in for a rough time. There is no guarantee that this will impact the average consumer as long as other parts of the economy continue to grow as recent indications show.

In my post on the recent Fed rate decision Chairman Ben Walks the Greenspan Line, I said that Dr. Bernanke prefers to leave rates alone if possible. However, he is also keenly aware of the housing situation and will not let it get out of control. Since the inflation readings continued to ease in the current GDP report, he has plenty of latitude to do this without losing credibility with the inflation hawks.

Even if the economic slowdown accelerates, this is not necessarily bad for the markets. The Fed has a variety of means to ensure a soft landing. Our Follow the Fed investment philosophy emphasizes that if the Fed eases aggressively, small stocks can do quite well even if large stocks as represented by the S&P 500 languish. This was the case from 2000-2005 as the data shows.

You also have to remember that we are entering the election cycle that I described in What the Bookies are Saying About the Upcoming Bear Market. Fed chairmen do not like bear markets to occur in the two years prior to a Presidential election.

Remember always to separate the news from the noise.

Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.

Tags: Federal Reserve, FederalReserve, GDP, inflation, Market Matters, MarketMatters, recession

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Reader Comments (Page 1 of 1)

10-27-2006 @ 12:41PM

Gary E. Sattler said...

This is the place where I get off the train... and stand in front of it.

If the last four weeks have shown us nothing else, they have shown us that the American stock market has reached the place where it refuses to wildly reacte to govenrment figures and announcements.

Goverernments don't run economies... they strangle them.

We are watching market players who have realized that they can direct the economy rather than be directed by it. Your stock market is maturing.
It's not your daddy's market any more.

How many times in the last four weeks have we seen the stock market run contrary to conventional wisdom? Four weeks ago they were calling it irrational. Those falsely touted market predicting algorithms which so many uncreative investors bet their wads on are all based on historical performance. They signify a future knowledge of nothing. They're changing as you read this. Anyone who bets millions of dollars based on what has already happened is gambling with blinders on. It's like placing poker bets based on what happened in the last game. It's a hopeful dreamers world. It reveals a great lack of initiative.

Today's smartest investors are doing their homework, picking safe positions and then placing their money with instructions of what shall be done with it. Short term traders are still the real gamblers but even they are getting more savvy in their choices. There's so much quality information available in quick fashion that quick trades and short positions can be better calculated and with greater speed. Ask the short traders, they'll tell you that their game has become much more exciting and extremely fast paced.

So as we enter this last leg of the presidential cycle I challenge you to test my theory against what actually happens. You have the historical picture describing what the market does towards the end of an incumbent Republican president's term. Do you think this term will fit the pattern? I don't. It's a new game now. The market has finally decided that they're sick of reacting to what are claimed to be economic conditions. They know they are in the position to drive them. Barring any earth shattering outside interference, you have a stock market which is prepared to be the driving force in American economics... not a hostage to them.

In my humble opinion;

It's about time folks!

Blessings to ALL

Gary E. Sattler