Wednesday, June 23, 2010
A bullish shift in policy?
The economic news that came out today was nothing short of grim. New home sales plunged 32.7% last month to the lowest level on record, casting doubt on the broader outlook for growth. More and more of the data is starting to show the same: retail sales, manufacturing, existing home sales, weekly jobless claims, all indicating weakness.
But what the data is telling us now the stock market already told us a month ago when it slid over 1000 points. Most people viewed that downturn as a “correction,” believing that it was only a breather and that the economy was still in good shape. Now, however, those same folks are starting to realize that the economy is not as good as they thought. This new “revelation” is what’s causing stocks to sell off.
In spite of the mounting gloom, there may be reason for hope. It comes in the form of a what appears to be a shift in the Administration’s priorities. For much of this year Obama has been talking about “fiscal responsibility” and reigning in the deficit. This was bearish talk for the markets because it’s clearly not the time for spending cuts and deficit reduction when so many millions of people are out of work and when industry is running far below capacity.
However, the grim numbers may be causing things to change. Obama and his economic team seem to have have embraced a new tone. The focus may be wisely returning to growth, rather than deficits. In an Op-Ed in today’s Wall Street Journal, Obama’s chief economic adviser, Larry Summers, and Treasury Secretary Timothy Geithner, warned about reducing deficits at the expense of growth. “Without growth now, deficits will rise further and undermine future growth,” they wrote.
This may not seem like a lot, however, it is an important shift. It also comes at a time when a growing number of influential economic commentators, like Nobel Economist Paul Krugman of the New York Times, and Martin Wolf of the Financial Times, also talk about the dangers of austerity and cutting spending prematurely.
If policy gets focused back on growth this would be very bullish for stocks.
In the next few days and weeks the economic data is likely to look terrible, however, that would provide even more impetus for the Administration to make growth a priority.
If the Administration’s rhetoric marks a shift in policy then any further selloff in the stock market would be a blessing in disguise. It would provide an opportunity to get in cheap, while the crowd is bailing out.