Waiting Game

SAN FRANCISCO -- As if on cue with the onset of August, the dog days are here. Oh sure, there were some big individual movers Tuesday, while the Dow Industrials and Nasdaq Comp touched around 1 p.m. EDT and then went their separate ways. But you get the sense most market players have resigned themselves to the fact not much is going to happen this week until Friday's employment report ; and, beyond that, not much more until we get close to the Federal Reserve's Aug. 22 meeting.

With that in mind, the question of whether the Fed tightens later this month remains, of course, paramount. Tuesday's economic data did little to move the debate toward resolution.

The National Association of Purchasing Management's index of manufacturing activity was unchanged in July at 51.8. That was slightly weaker than economists were expecting -- suggesting to some observers the Fed can stay on hold this month. But the prices paid index and employment index each rose, meaning it's still premature to come to such a conclusion (especially before the jobs data are released).

The NAPM data and auto sales reports lend credence to the belief the Fed will stand pat on Aug. 22, according to John Lonski, senior economist at Moody's Investors Service, who believes the odds slightly favor such an outcome. But "there could be a drastic shift in market sentiment were we to get a sizeable upturn by private sector jobs in July, coupled with upward pressure on wages," he conceded. The economist suggested a nonfarm payroll figure above 250,000 could swing the pendulum toward the rate-hike side.

With the market thus pretty firmly in limbo, the opportunity presents itself to take a step back and look at the bigger picture. Or so I thought after an appearance today on Yahoo! FinanceVision. A viewer emailed a question wondering if the six Fed tightenings beginning June 30, 1999 have had time to really impact the economy, given the "lag effect" that accompanies Fed policy changes.

I replied that the equity market seems to have a more direct impact on economic activity than in the past, because of the higher level of participation by individuals, a.k.a. consumers. So perhaps the time necessary for Fed policy changes to take effect has shrunk, given the market's near-instantaneous reaction (or anticipation). Conventional wisdom holds it takes six to nine months for Fed policy changes to affect the economy. But perhaps that -- like many other truisms -- needs to be re-examined.

I looked into this issue upon my return to the office. But I quickly found more questions than answers. Most importantly: How to measure the direct impact of the stock market on the economy? One source observed that the ever-elusive "wealth effect" isn't an investor selling stock to buy a boat, but the guy who takes a loan on his paper stock profits to buy a boat.

Another source quipped I was searching for the Holy Grail and that if I found the answer, I wouldn't be working for TheStreet.com much longer.

I'm not looking for a new job, but I do plan to pursue this question further, when I can (hopefully) cull together some additional data or, at least, some expert opinions in order to help shape the discussion.

As always, my intent is not to provide a simple answer to a complex question, but to spur some additional debate that I hope helps you all be savvier about the market and, by extension, your portfolios.

GuruVision

Lots of feedback to last night's piece about the Wall Street strategists. Thanks as always. A few salient observations for your inspection.

As I reported, Edward Kerschner, chair of the investment policy at PaineWebber (who has called the big picture about as well as anyone else this year) seemed to be growing more positive in his most recent market commentary, published July 30. But a source points out that Kerschner's most recent asset-allocation recommendation is fairly conservative at 53% stocks, 26% bonds and 21% cash.

The strategist was unavailable to comment, but a source at PaineWebber confirmed that it was his recommended allocation as of July 27.

If Kerschner were really bullish on equities, you'd think that cash component would be a little lower. Or maybe he's getting ready to put that cash to work?

Finally, one reader asked the following: Do you really think Abby [Cohen] would be cautious ahead of the Goldman Sachs (GS - Cramer's Take - Stockpickr) secondary?

While that sounds an awful lot like the arguments raised before Goldman's IPO last spring, and we hate to cater to such crass cynicism, the point is germane. Tuesday evening, Goldman sold 40 million shares at 99 3/4, or about $4 billion. The sale raised about $1.64 billion for 150 current and former Goldman partners, Cohen included.