Thursday, April 5, 2012

Stock Market Malaise?

The Lehmann Letter (SM)

The stock market opened lower this morning, continuing the rough patch of the last couple of days. Some observers attribute the difficulty to the European debt crisis and others attribute it to Federal Reserve policy.

Readers know this letter believes that Europe will face its debts and emerge stronger.

With respect to Federal Reserve policy, there are two concerns that revolve around rising interest rates: First, that rising rates will slow economic expansion and second, that rising rates will lure investors away from the stock market.

Rates are now rock-bottom and the recently released minutes of the Federal Reserve's March 13, 2012 open market committee meeting should not be cause for concern:

Here is a key paragraph:

“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

Those words are not directed toward long-term markets, but it's hard to believe that the Fed will risk expansion by raising rates.

There is, however, another long-term risk that this letter has articulated more than once: Since profit margins have probably peaked, it is hard to imagine that the economy will grow sufficiently rapidly to sustain rapid earnings growth. Sales will probably not expand quickly enough. That concern should remain in investors’ mind.

(To be fully informed visit

© 2012 Michael B. Lehmann

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