Taking Advantage of a Brutal Sell-off
It was one ugly week on Wall Street. Bonds were just about the only safe haven this past week as both commodities and stocks got hammered. Conventional wisdom on Wall Street is presently split into two camps both of which means bad news for equities. There are those believing the Federal Reserve has been effective in cooling growth and then those fearing that more must be done to ward off inflationary pressures. Data coming out this past week painted a picture of an economy that is cooling at a time when businesses are just now beginning to pass higher energy costs onto consumers. It’s not surprising to see many momentum investors taking bearish positions or moving to the sidelines in this environment.
Persistently high oil prices are putting more pressure on firms to pass along higher energy costs to consumers. Rapid productivity growth and subdued wage pressures helped to provide a buffer against energy’s run up the past couple years. However, businesses have gotten just about everything out of workers possible. An improved labor market is starting to convince employees that better opportunities might await them elsewhere. That’s about the extent of the bad news in the current economic environment. Only on Wall Street can a strong labor market be bad news! On the positive side, inputs make up a small portion of the overall inflation picture. Productivity may be declining, but it still is treading at stronger than normal levels. Also, global growth remains extremely robust. Earnings, particularly for international firms, will remain strong in the face of slower economic growth in the United States.
Tomorrow morning will be a great time to take a look at some bargains in the stock markets. Lots of institutional money moved out of stocks into cash last week. With bearish sentiment very strong at the moment, it will only take a small event to spark a decent rebound.