Fairy Tales
AHEAD OF THE TAPE
By JUSTIN LAHART
March 15, 2005; Page C1
Some pundits have been talking about how the U.S. economy is in a
new "Goldilocks" environment, where growth is not too hot, not too
cold. But investors are wary that the bears could come home early.
The Labor Department's February employment report showed jobs growth
that was ahead of economists' forecasts, but below what many traders
had expected. Treasurys rose, pushing the yield on the 10-year note
down to 4.32% from 4.39%. Stock-market participants sent the Dow
Jones Industrial average up over 100 points.
The fervor faded as it became apparent that the Treasury market's
apparent relief over the jobs report had more to do with speculative
players rapidly exiting bets on a strong jobs report than it did
with bond investors' penchant for buying. Last week, the 10-year's
yield went above 4.5% for the first time since the summer and the
Dow lost 166 points.
Today's report on February retail sales is the market's first big
economic test since the jobs report. The average forecast calls for
core retail sales, which exclude autos and auto parts, to pick up by
0.6% over January's level. With service-station receipts boosted by
higher gasoline prices, a bounce in construction sales, strong chain
store sales and a flurry of income-tax refunds, the report may trump
estimates.
If the report prompts selling in the skittish Treasury arena, the
stock market, too, could have a tough day. The environment is
challenging enough with earnings growth slowing. If Treasury yields
rise, it could cause trouble for a host of rate-dependent companies,
like home builders, as well as make the bond market a more
attractive alternative for investors' cash.
But the Treasury market's worries haven't made their way into the
corporate bond market; to the contrary, the difference between
corporate bond yields and Treasury yields has continued to narrow.
For investment-grade bonds, this spread is about half of what it was
two years ago, according to Standard & Poor's.
This in itself may be a problem, indicating that investors don't
have enough respect for the risks. At the same time, there is
something to the corporate-bond rally. Companies continue to build
strong cash positions, making it easier for them to make good on
their debts. In an indication that they remain wary of risk, they
aren't issuing much new debt.
Those are things that stock-market investors can take solace in. As
M.S. Howells strategist Brian Reynolds points out, when really bad
things happen to stocks, they usually happen to corporate bonds
first. |
