Written by Admin | Jun 12, 2008 4:00:00 AM
Yesterday was a tough day for the markets. As the S&P 500 slipped below recent technical support levels, stocks accelerated to the downside as higher oil and commodity prices gave rise to talk that the Fed may need to start raising rates sooner rather than later.
Yesterday, the S&P 500 had only 45 advancers, of which 27 or 60%, were energy names. Energy is now the second largest weighting in the index, moving slightly above financials where further write downs and executive departures continue to plague the sector.
Historically, the Fed hasn't raised rates until they have become comfortable that the economic outlook is back on track. While inflationary pressures are building, unemployment levels have also increased. Given a dual mandate to be concerned with both employment and price stability, the Fed's pitch count is now full at 1 and 1. The tight spot has increased anxiety levels for spectators and revived recessionary nerves. But for now, the decision remains a push.
How will the game play out? Given the economic stresses facing many emerging nations like China, our bet is that these economies will soon slow, taking the boil off the commodity complex and allowing inflationary pressures to ease.
When you're depending on a double play to get out of a tight spot and win a game, the tension builds. But that same tension is also what makes the game fun. Double plays happen. Our bet is that the Fed will remain focused on the game and that inflation will be out before it gets home to roost.