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Barry Ritholtz Recapping the First Half of the Year By Barry Ritholtz Special to RealMoney.com 6/29/2004 9:39 AM EDT URL: http://www.thestreet.com/p/rmoney/barryritholtz/10168238.html |
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With the halfway point of 2004 coming up on Wednesday, I thought it might be instructive to reflect on the macro gains and losses the market has seen so far this year. I'm not referring to any specific winners or losers you may have had. Instead I want to take stock of the broader issues affecting the financial environment and your portfolios. Some of the key factors I track closely haven't changed much from where they were at the beginning of 2004. Major U.S. markets. Much to the surprise of many people, the markets have made scant progress in the past six months. In their year-end predictions, many pundits (yours truly included) expected to see the momentum from 2003 continue but ultimately fade by midyear. Instead, the market stumbled by the end of January and only broke its six-month downtrend last week. As of Friday's close, major indices were within a percentage point or two of where they began the year. It's as if the first two quarters of the year never happened. The second half gives investors another chance to try to catch an early part of a bull leg up. Given the recent mutual fund outflows, will individual investors be late to the party again? The macro economy. First deflation was the enemy, so the Federal Reserve announced that it would do whatever was necessary to stop this scourge. Whoops! Did I say deflation? I meant to say inflation. As last year's tax stimulus faded, the initial fears were that, like Japan, we were about to enter a deflationary cycle. Not only did deflation fail to materialize, but the new fear became that the economy was getting too hot to handle. If inflation reared its ugly head, the Fed would be forced to react. GDP, durable goods and unemployment levels have dropped to sustainable levels. The economy has entered a lukewarm, noninflationary growth stage. The Federal Reserve. Fed critics blame Greenspan & Co. for allowing the bubble to overinflate, only to ultimately be forced to pop it in 2000 as the economy overheated. Then they blew serial bubbles in bonds and residential housing. When the Fed started a rate-hiking cycle four years ago, I think it raised rates too far too soon. The Fed acted quite appropriately for once, at least when compared to Japan's central bankers. Unlike 2000, the Fed telegraphed the measured upcoming quarter-point increase and has allowed the markets to adjust to a new tightening cycle. Postwar Iraq. The neoconservatives who pressed for the invasion of Iraq failed to create an adequate strategy anticipating the postwar period. They disbanded Iraq's military and the civilian bureaucratic infrastructure. This was a colossal blunder. It created an opportunity for insurgents to wreak havoc and cause mayhem in various towns outside of Baghdad. This caused increased U.S. casualties and deaths, and made Iraq appear to be slipping from the U.S. grasp. Poor planning also led to a series of political embarrassments -- from the torture case to running low on ammunition to an insufficient number of troops on the ground. With the handover to the Iraqi Ruling Council a couple of days early, the planners have gotten one right for a change. As a result, the insurgents have been denied an opening to thwart Iraqi sovereignty. Although the original postwar planners were grossly incompetent, the new strategists seem to have their act together. Presidential polls. President Bush has taken a beating in the polls over the past six months. One embarrassment after another drove his approval ratings to the lowest levels of his presidency. Starting with the nondiscovery of weapons of mass destruction to the Fallujah insurgency, the Abu Ghraib torture scandal, and the 9/11 Commission's declaration that there was no link between Saddam and 9/11 or al Qaeda, the incumbent has seen his approval ratings erode for all of 2004. Recent polls show President Bush regaining a lead in some surveys. This improves the odds of his not being a one-termer like his father. Not everything has remained unchanged since the year started. Quite a few things are significantly higher or lower: Fuel costs. Oil cost roughly $34 a barrel when the year started, and gasoline averaged about $1.75 a gallon. Those prices are now $37.50 per barrel and $1.95 per gallon. That's better than they were a few weeks ago, but still considerably higher than when the year started. Interest rates. The 10-year Treasury began 2004 with a 4.25% yield. It is now 50 basis points higher at 4.75%. Market internals. While the indices did a round trip, most of the internals -- especially the Nasdaq cumulative high-lows -- are still appreciably below the healthy levels they saw in late 2003.
