Trying to hold steady
The past week has been a strenuous one for the markets. Over the past week we have have the Chairman of Securities and Exchange Commission, Harvey Pitt, resign due to pressure over his past and his appointment of William Webster to run the accounting oversight board. Then William Webster himself resigned from the accounting board due to controversy from his involvement in U.S. Technologies. Less noticed, though, the SEC's chief accountant, Robert K. Herdman, also quit for his part in the selection Webster to run the accounting oversight board.
Interestingly though, the news has had little effect on the markets as they have stayed relatively stable over the past week, with most days seeing little or no change. News like this in the middle of the summer would have been disastrous for the market, resulting in the Dow decreasing hundreds of points. Last Thursday the Dow Jones Industrial Average closed at 8586.26 and this Thursday it closed at 8542.13. This is a rather insignificant change in the Dow-only about a half percent difference. This was helped by the strong performance of the Dow this Thursday, gaining 143.64 points.
The most interesting news from this past week relates to retail sales. Retail sales for October were flat, beating many analysts' expectations. The retail sales, although flat, are up from 1.3 percent decline in September. This should be seen as good news for another reason. Flat retail, despite diminishing sales in the auto industry, could be seen as a sign of the economy recovering. Some people might see this as negative because auto sales slipping might lead some to believe that one of the best parts of the economy are slipping and would take the rest of the economy with it. The rise in GDP to 3.1 percent in the third quarter was due largely to the success of the auto industry over the summer. However, I view the stability of retail sales as a sign of recovery. The stability of retail sales, despite increasing weakness in the auto industry implies that other sectors of the economy are starting to pick up the slack, which I view as a sign that the economy could be starting to recover.
In support of this view of a possible recovery, Alan Greenspan said to Congress yesterday in his testimony that "the economy's most likely projection is to come out of this soft spot and to start accelerating."
He also hinted at the possibility of an interest rate increase, which indicates more concern about inflation than the status of the economy. However, being the smart man that he is, Greenspan covered himself, saying there is a possibility of further rate cuts if the economy begins to slip again.
The biggest obstacle for the economy to overcome is investor confidence. As I said last week, the weakest part of the economy has been business investment, the result of a lack of consumer confidence.
The stability of the markets despite a pretty shaky week, seems to indicate that investor confidence is at least on the rise and that the performance of the market despite bad news implies that investors are not as flighty as they were during the summer amid the wealth of corporate scandals.
Investor confidence still needs to rise more-not to the irrational levels of the late nineties, but enough to help insure the recovery of the economy.