Barron’s July 5th lead article in The Trader began with: “The most coveted talent on Wall Street right now might be an ability to tell a pause from a peak. Just as investors gained assurance that the Federal Reserve would only gradually wean the market from its free-money diet, Wall Street found reason to worry that the economy itself might be slowing to a similarly ‘measured’ growth pace.”

On July 2nd June’s job creation was reported at 112,000, which was less than half the median forecast. Unemployment stayed at 5.6%. Of course neither the economy nor employment grow in a straight line, and the jobs figure will be subject to revision. For the first six months of 2004, job creation was 1.3 million, the largest six-month gain in four years.

Sales at Wal-Mart, Target and GM slowed. The slowing of those sales may be attributed in large part to recent record gasoline prices that have the effect of a tax. More money paid for gasoline results in less money in the consumer’s pocket. Less money in the consumer’s pocket results in less money to be spent at Wal-Mart. Weather was also blamed by Wal-Mart.

The strong economy has slowed a bit.

The stock market continues to wallow in lethargy. The Dow Jones Industrial Average is minus 0.18% for the year to June 30th. The S&P 500 index began the year at 1111.92 and as of this writing it is 1112.82 – flat. It is still down more than 25% from its 2000 peak. Inflows into mutual funds were $564 million in May, down from $23 billion in April.

It is interesting that Bill Gross, head of Pimco, the world’s largest bond fund managers – almost $400 billion – bought $35 billion of US Treasury bonds and other high quality bonds before the Federal Reserve’s ¼% increase in the federal funds rate on June 30th. Gross, for about a year, had been an extremely outspoken bond bear and is widely listened to as a result of his record and the size of the fund. He obviously thinks that inflation will not be the near-term problem many think.

In Bill Gross’ monthly Investment Outlook, July 2004, it is pointed out that total credit market debt (all sectors) as a % of U.S. Gross Domestic Product is now higher (299%) than in the 1929 era (270%).

I would like to quote one of many interesting passages in his letter: “And then there’s the Fed. Wednesday’s interest rate hike is just the beginning of a journey as to who knows where or when. Not only our housing market, but the financed-based profits (40% of all profits as shown below) of American corporations are at risk. This in turn speaks to the stock market, P/E ratios, and wealth/paper-based prosperity, that depend on the continued low cost of excessive debt taken on in recent years.”

“While Greenspan ‘speak’ points towards gradual and measured hikes to return to a more neutral interest rate policy, he as well as other global central bank chieftains must acknowledge that ‘neutral’ in a levered global economy is a yield shrouded by fog and fraught with uncertainty.”

For the Pimco Web site and Bill Gross’ monthly Investment Outlook go to and then select US.

The question for the economy, interest rates and stocks – Is it a Pause or a Peak?

John W. Hamilton
July 8, 2004