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Most stock market indexes rebounded from the troughs that they set in mid August and finished the month about where they had started, in negative territory for 2004.
You would think that the bond market would have been in a free-fall since the Fed started to raise interest rates in late June, but most bond prices and yields stayed in a narrow range throughout August. The bond market finished August mirroring the stock market, with prices and yields unchanged for the month.
Oil prices rose to almost fifty dollars per barrel in August as the geo-political quagmire in Iraq continued to escalate, fueling the energy traders to continue to bid up the price of oil.
The stock market rally at the end of August was fueled by the decline of oil prices off their historical highs set earlier in the month.
Most economic reports disseminated throughout August seemed to indicate that the fragile U.S. economic recovery was slowing.
The Fed's chief Alan Greenspan, in a speech that he gave in August, said that the U.S. economy had hit a "soft spot" and that it would resume its growth very soon.
However, with the Fed sure to
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raise short-term interest rates ahead, many investors remained cautious, as higher interest rates is not an elixir for economic growth or corporate profits.
September began the way August ended, that is up, for most major stock market indexes.
Investors continued to ignore the economic impact of oil prices rising throughout September. Fueling the bulls in the oil market was the quagmire in Iraq as the death toll rose daily, with no end in sight.
The bears got the upper-hand again after the Fed met on September 21, even though most Wall Street pundits predicted that the Fed would raise short-term interest rates another 1/4%, which in fact they did. This was the third time in a row that the Fed raised short-term interest rates by 1/4%.
Most major stock market indexes declined significantly in the next few days after the Fed's meeting, and remained firmly in negative territory for 2004, albeit above their lows set in mid August.
Major stock market indexes regained their upward momentum in the last week in September, finishing the roller coaster month about where they had started.
Bond investors seemed to ignore the Fed's campaign to
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continue to raise short-term interest rates, and as such, most bond yields remained range bound throughout September.
Crude oil prices continued to climb throughout September closing the month at near fifty dollars per barrel, an all time high price for crude oil futures traded on the New York Mercantile Exchange in its twenty one year history.
With the many economic headwinds ahead, including but not limited to the negative economic impact of; the Fed's campaign to reign in inflationary pressures building in the U.S. economy by raising interest rates; the War in Iraq escalating; the potential for another terrorist attack on U.S. soil; the rise in the price of crude oil, gasoline, heating oil, and natural gas; and the impact of the rising federal deficits due to the funding of the War on Terrorism and Iraq; I am cautious about what is ahead for both the stock and bond markets.
I remain committed to energy stocks and TIPS as the core holdings for the portfolios that I manage for my clients. In addition, I maintain a short-position in long-term treasuries as a hedge against the potential for any price declines of the TIPS in my managed portfolios, if interest rates rise ahead.
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