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Stock market investors were concerned that rising interest rates would diminish corporate profits as consumer borrowing costs rose, hurting retail sales, mortgage interest rates rose, imperiling the real estate boom, and corporate borrowing costs rose, lowering corporate profits.
Crude oil prices continued to rise throughout May giving more ammunition to the stock and bond market bears.
High crude oil prices could fuel inflation ahead, and in addition, hurt the consumer sector. Gasoline demand is not very "elastic" and as such, when consumers pay more at the pump they might reduce their purchases elsewhere.
May finished with most stock market indexes on the up-swing. Stock market investors shunned their fears about the potential for interest rates and inflation rising significantly and instead seemed only concerned about being left behind on the next rally.
The fact that most stocks were trading at prices that represented some of the highest historic valuations, did not assuage the appetite for these over-priced stocks by many investors as May came to an end.
Against this back-drop, the War in Iraq continued with daily casualties and bombings all but ignored by the U.S.
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public.
I guess after a while the public is just numbed by their daily dose of the news of the constant blood shed in Iraq and in Israel.
The bond markets treaded water throughout May, albeit with its prices near its lows and its yields near its highs for 2004.
Bond investors continued to dissect the economic news throughout May to try to determine what the Fed would do at their next scheduled meeting on June 30th. How would the Fed act to accommodate their public statement that they made at their meeting in early May, that they were ready to raise interest rates in a "measured" way in the future?
Most major stock market indexes continued upward in June bolstered by the employment report released on June 4th. This report disclosed to the public that 248,000 new jobs were generated in the U.S. economy in May.
Even though the number of new jobs in May was 100,000 less than was generated in April, it still was enough to fuel the bulls in June, who chose again to ignore all the economic headwinds that would be generated when the Fed did in fact start to raise interest rates again.
On the geo-political front, the
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War in Iraq continued with no let up in the daily casualties and fatalities. Even though the U.S. was still committed to their June 30th deadline to return sovereignty to the Iraqi people, the "insurgents" continued to wield their craft of blood and destruction throughout June.
The Fed did raise short-term interest rates at their June 30th meeting 1/4% as most financial pundits had prognosticated. They also kept intact their public statement to raise rates ahead in a "measured" way unless inflationary signals were rampant.
On June 30th the day of the Fed's meeting, the stock and bond markets continued to rally as stock and bond bulls were relieved that the Fed did not change its rhetoric about its intentions to raise interest rates in a "measured" way.
During the second quarter of 2004, I have sold all of the short-term government and corporate bonds in the portfolios that I manage for my clients. I have replaced them with "Inflation Adjusted U.S. Government Bonds".
In addition, I have added to the weightings of gold mining, energy, and commodity based stocks for these managed portfolios.
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