The Dow rallied 119 points to 11,219, and the S&P rose 15.35 points to 1278, bumping up against stiff resistance at the 1280 level.
The government said the Q2 GDP grew by 2.5%, as consumers begin to get slammed by higher interest rates and energy costs. This is the lowest reading on GDP since the 4th quarter of 2005 which was impacted by the hurricanes along the Gulf Coast.
So, where do we go from here?
Investors seem to be betting that the Federal Reserve is poised to do a quick "about face" soon after the rate hikes cease. As long as energy prices remain elevated, inflation pressures will continue.
Given that the consumer has already signaled that they are pulling back, the next shoe to drop will be company earnings. As earnings estimates begin to be revised, the market will continue to punish individual stocks that are tied to the purse strings of the consumer.
We have already seen the some of the fall out on the consumer. Take for example the returns of these 3 select ETF's;
SMH- Semiconductor HOLDRS: -9.39%
IGW- Goldman Semiconductor: -11.05%
XHB- SPDR Homebuilders: -23.99%
PKB- PS Building& Cons: -14.19%
BDH- ML Broadband: -18.39%
IGN- GS Networking: -17.85%
WMH- Wireless: -9.47%
As earnings estimates begin to get revised downward and energy prices remain elevated, the fed will remain vigilant on inflation as long as inflationary pressures exist. If, and when, energy prices begin to fall, the fed will be in better position to begin lowering rates. If energy prices remain high, we are looking at an economy similar to the 1970's.
Even commodity guru, Jim Rogers expects a correction in the price of raw materials and energy, but he concludes;
"The bull market is not over yet. The bull market has years to go, as far as I can see."
So, how long will the bull market in commodities last? Rogers said;
"Well if you go back in history, there you will see that the shortest bull market in commodities that I found lasted 15 years, the longest bull market lasted 23 years. So, this bull market will last until some time between 2014-2022. It has got a long way to go, as far as I am concerned, because the supply and demand is seriously out of balance."
Betting that the fed is going to lower rates while foregoing the risks of inflation, is in my book a foolish bet.
Rogers believes that oil prices will reach $100 a barrel some time this year. T. Boone Pickens has uttered the same words, but with a different time frame.
Rogers went on to say; 填nless somebody discovers something very quickly and very accessibly, we池e all going to be dumbfounded at how high the price of oil will go, including me,鋳
In March 2005, Goldman Sachs analyst Arjun Murti said; 努e believe oil markets may have entered the early stages of a 壮uper spike� period, which we now think can drive oil prices toward $105 per barrel.鋳
So, while real estate slows, and the consumer capitulates, energy prices and inflation, can remain remain elevated.
We will continue to get sharp rallies along the way, but it seems that the fallout from a slowing economy is just beginning.
