Good morning to you all. The US Commerce Department reported this morning
that
Gross Domestic Product (GDP) , the broadest measure of economic health,
grew by
a staggering 6.1% in the final quarter of 1998. Stated another way, the US
economy grew at 6.1%, which is the fastest growth rate recorded in the last 15
years.
On the surface, we would expect this to cause a great deal of damage to equity
markets as the unexpected strength fueled further worries on inflation and,
therefore, higher interest rates. However, the price deflator was up a muted
0.7 percent, the lowest level since 1959.
As a result, bond prices were actually up this morning, which means yields (or
interest rates) were actually down. Moreover, the S&P 500 futures indicated a
higher opening for stock markets.
CONCLUSION
This information should not be interpreted as positive for the stock market by
any means. In fact, the strong GDP growth raises concerns at AGORA that
continued strong growth will inevitably lead to higher interest rates as The
Federal Reserve is forced to keep inflation under control. Remember, the
price
of oil and other commodities will not stay at these record lows forever. Alan
Greenspan stated this on several occasions during his testimony this week.
When they inevitably rebound, Alan Greenspan will have to worry about the
double whammy effect of a strong economy and rising commodity prices.
At the very least, it takes the possibility of interest rate cuts farther
away.
As such, AGORA continues to remain very defensive and will continue to take
trading opportunities. With respect to mutual funds, we have been parked in
the money market for quite some time now.
Have a great day.
Regards,
AGORA
agoracorp.com
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