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However, long-term bond yields were actually lower when November ended than in early June. Bond investors ignored the Fed's concerns about inflationary pressures returning in the U.S. economy.
The fact that November was the bloodiest month in Iraq since the war began, did little to temper the appetite of the bulls for stocks, and as such, most major stock market indexes finished November near their highs for 2004.
Against this backdrop of euphoria for stocks throughout November, the U.S. dollar continued its decline against the Euro and many other major currencies in the world.
The fact that the continuing decline of the U.S. dollar would eventually bring higher interest rates and inflation that would be bad for stocks and bonds in the U.S. was disregarded by both stock and bond investors throughout November.
One of the catalysts for the declining U.S. dollar throughout 2004 was the rise in crude oil prices. Crude oil is priced in U.S. dollars, and therefore as the crude oil price rises it tends to devalue the U.S. dollar.
Crude oil prices declined slightly in November ending the month at $48 per barrel.
The stock market bulls main
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tained the upper hand throughout December driving up most major stock market indexes to near their best levels in 2004.
The bulls once again ignored the Fed's action of raising short-term interest rates at their regularly scheduled meeting in mid December.
There is an old adage on Wall Street pertaining to the Federal Reserve. This adage says "two steps and a stumble". This means that when the Fed raises interest rates two times in a row, the stock market is sure to decline (stumble).
So far in 2004 the Fed has raised short-term interest rates at each and every meeting since June, a total of five rate hikes in a row.
Stock market investors throughout 2004 have continued to ignore the Fed's determination to raise the borrowing cost's of consumers, home buyers, and businesses in order to slow the growth of inflationary pressures building in the U.S. economy.
Usually when borrowing costs are on the rise, slowing economic growth and lower corporate profits, the bears return to Wall Street. Lower corporate profits (earnings) is usually not an elixir for stock prices to rise.
Ironically, the bond market remained range bound through
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out 2004, even after the Fed started their fiscal tightening campaign in June more than doubling short-term interest rates by mid December to thwart the rise of inflation.
Bond holders usually react to rising inflation fears by selling their bonds, driving their prices down and their yields up, offering higher yields to new bondholders offsetting the impact of inflation.
However, bond investors have totally ignored the Fed's concern about rising inflation throughout 2004.
Crude oil ended December near the $40 threshold, as the oil traders dueled it out daily.
Oil traders ignored the rhetoric of OPEC about the need to reduce crude oil supply's again, and the daily carnage sabotaging the oil infrastructure in IRAQ slashing their oil output to the lowest levels for 2004. Ho-hum!
I remain bullish on oil and gold, and bearish on the value of the U.S. dollar against the Euro. To facilitate this posture for the portfolios that I manage for my clients, I maintain weightings in inflation adjusted bonds, foreign bonds and stocks in precious metal, energy, and commodities sectors.
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