Last week was the first week of the rest of your life. More to the point, last week was the opening stanza of market action in the new year. Consider it a leitmotif: Market dramatics are likely to reach Wagnerian proportions before the big gal in the Viking helmet finally brings down the curtain on the year 2000.
Friday's action clarified the theme. The
Bureau of Labor Statistics
released the anxiously awaited December
. As had been feared, it showed an expansion in jobs beyond the so-called consensus estimate, with a slight increase in the wage trend and a high quit rate. No evidence of slowdown here and some basis for concern about more vigorous reports to come. And the market reaction? Let me excerpt the
headlines: "Job growth and wages accelerate ... Treasury bonds fall as job data fuels rate concern ... Stocks in U.S. rally;
Friday saw a rebound in last year's winners after a tough start to the year, but the winners for the opening week as a whole were such losers from last year as the REITs and utilities. In fact, a list of last year's winning industry and sector groupings correlates highly with a list of last week's losers. It's early, but value is trouncing growth. Leitmotif: The last shall be first? Maybe so. Even on Friday, when growth made a comeback, it was led by "old growth" names such as
Procter & Gamble
Last year's tech-centered performance was so jaw-droppingly in excess of anything that had been expected that there must be a latent fear in the market that it was too good to be true. The first week's action tended to support that assertion, anyway.
Leitmotif: Strident brass and percussion as mo-mo dip-buying clashes with progressively higher interest rates. Bonds produced a negative return in a volatile week, but were altogether not too bad given their recent habit. It helped to knock stocks down for most of the week, until Friday's session brought in what may have been a scouting party for the dip-buying hordes awaiting their next opportunity. Bonds continue to assess the performance of the economy and its likely outlook, guess at what the
thinks about it and steadily sell off. As rates ratchet higher, they make market values look ever more extended, which periodically knocks the market down, thereby producing the main chance for the dip-buyers. Back and forth, ponderously, across the stage.
This process should play out musically over the next several weeks as the Fed withdraws the precautionary bulge of outright and standby credit it had injected into its Y2K risk aversion. Choose your concept -- monetary base, M2, M3, vault cash, currency in circulation -- there was a lot of money around late last year. The Fed now needs to take it back out. The ballooning of money supply, however measured, roughly coincided with the astonishing acceleration in market performance over the last two months of 1999. It may be a post-hoc fallacy, but for lack of a better hypothesis, all of that money had to be parked somewhere. If its temporary existence produced the November-December fireworks, what will its removal produce?
It's a fascinating question because it is a leitmotif for the year or years ahead, when monetary authorities around the world switch from their now apparently successful attempt to stimulate and accommodate economic momentum to trying to restrain it. As they yank episodically on the reins, there will be
sturm und drang
as the market buckles under the strain. Dip-buyers will see their chance to charge in and will do so in violent strikes. The market will rebound vigorously and the monetary authorities will then be presented with the same dilemma at a higher level of risk. Back and forth across the stage, with a high casualty rate among leading actors, bit players and stage hands. This is not the year to sell volatility.
A phrase that has begun to nag, or rather haunt, me is, "there is no kill but overkill." I can't recall clearly where I first heard it, but I associate it with the late 1970s when the
Feds were seen as willing to work against the virulent inflation of the time, but were suspected of not being ready to take big chances to bring it under control. The risk then was that effective action might have had the undesirable side effect of inducing recession. So every modest and ineffective tightening action was seen as a buying opportunity -- lock in your rate before it goes higher. It wasn't until
arrived on the scene to slay the dragon that '70s-style dip-buying behavior came to a end. And a bloody end it was -- Volcker starred in a monetary opera Wagner would have admired.
Policy authorities will always prefer to achieve their ends at the least possible cost, to get the job done without overkill. But once full-throated speculative buying is loosed on the scene, once it's suspected that central bankers are unwilling to pay the necessary price, the stakes ratchet much higher. Then, timid actions become counterproductive. Then, there is no kill, but overkill.
last week nominated Alan Greenspan to another four-year term as Fed chairman; his confirmation is one of the few certainties in Washington, D.C. Presumably he will look to protect his past record as well as set his future legacy in lustrous marble. He has engineered more than one soft landing -- that is, avoided overkill -- during his 12-year tenure. In 1987 to 88, and again in 1994, and maybe again in 1998, Greenspan stage-directed his resources so adroitly that big imbalances were not permitted to upset the whole production. These were rare feats of skill, abetted by whatever luck Valhalla's gods allowed to influence the action.
Can he do it again? There are powerful vectors of momentum in U.S. domestic demand and in dip-buying -- or should I say inflationary? -- psychology. These forces are now spreading globally. They will clash noisily with whatever degree of monetary restraint Greenspan and his central banking colleagues choose to introduce. Just a little, to avoid overkill? That might work; it has certainly worked for him in the past. But if he is seen as unwilling to spill real blood, the dip-buying strategy will be reinforced and he'll have to strike harder to have the same limited effect.
The action is likely to be violent, certainly loud and probably bloody, before the fat lady finally sings.
Jim Griffin is the chief strategist at Hartford, Conn.-based Aeltus Investment Management, which manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he invites you to comment on his column at