As far back as last spring, investors have been regularly regaled with
warnings that our white-hot economy was headed for a cool-down.
Indeed, “slower growth” became not only a persistent market mantra, but a
policy goal of the Federal Reserve, which spends the better part of the year
determinedly tapping the economy’s brakes through a series of interest-rate
hikes and sober-minded jawboning from Chairman Alan Greenspan.
Despite some loud grumbling from runaway bulls, most Internet investors knew
a return to rationality was healthy in the long run for overvalued ‘Net
stocks, even if they may have preferred their medicine in one large gulp,
rather than dispensed in several portfolio-wrecking portions.
Now, even as investors wait for signs of an impending turnaround for
Internet issues, economists are starting to use the “R” word. As in
“recession.” And that could drive additional investment money from stocks
into fixed-income securities and funds, as Ken Waggoner points out in
Monday’s Web Fund Report.
The latest Index of Leading Economic Indicators offers strong hints of a
downturn. Stock prices fell 0.10% in October, while consumer goods orders
dropped 0.11%. This means households are beginning to spend more carefully.
Though the Federal Reserve throughout this year has stuck to its position that curbing possible inflation is worth risking an economic slowdown, these latest numbers may be pushing the Fed toward a new stance. On Monday, a top Fed official offered a hint that regulators believe the half-dozen interest rate hikes from June 1999 through last May have had the desired effect, saying that “moderation of demand is now in place.”
Other than a resolution of the protracted legal struggle for the
White House, the only real tonic awaiting the market in the remaining weeks
of the year would be a Fed move toward interest-rate cuts.
The board is scheduled to meet on Dec. 19, and while there’s no chance it will vote
for a rate reduction then, it could set the stage for cuts next year by
dropping its anti-inflation policy in favor of a neutral view of the
For Internet investors, that’s the closest they’ll come to a Christmas
present this year.