Five Key Elements for the Second Half
As you set your own course for trading in the second half, consider mapping your views to the framework that I propose in my new book,
. Here are the key elements, with my own views:
Determine the major economic trend: neutral with a mildly positive bias.
A modest rebound in activity is still evident in the weekly leading index of the Economic Cycle Research Institute. There are dozens of ways to judge economic growth by squinting at government, academic and industry reports, but this multimeasure gauge has offered a useful shortcut for years.
Hesitation: ISI Group, the prominent institutional research firm, has cut its estimate of second-quarter U.S. gross domestic product growth to 1% from 1.5%, and has said it is likely to cut its estimate for the third quarter to 4% from 5%. The discouraging news, ISI said in a recent report, is that its weekly survey of results at a wide range of individual companies is stuck in neutral -- and needs to ramp up sharply by September to support the Q3 figure of 5% growth. Also, it notes that unemployment claims have deteriorated significantly in recent weeks, durable goods orders and inventories were both down in May, and business loans remain depressed.
Determine major money supply/fiscal policy trend: very positive.
The Bush administration has pulled a number of key levers in its attempt to get the economy rocking by the time the 2004 election season begins in earnest: tax cuts on dividends and capital gains; massive new withholding tax cuts retroactive to Jan. 1; hikes in federal spending on the military and Medicare; cuts in short- and long-term interest rates to 45-year lows; hike in the monetary growth rate to 7%; boost of credit expansion in the form of home refinancing to new highs -- three times last year's record rate; and permitting the U.S. dollar to fall in value vs. foreign currencies, boosting the fortunes of multinational companies in Europe and Asia. There's virtually nothing that government or central bankers can do to kick-start business and consumer spending that hasn't been tried.