MMM Economic Outlook

MMM Economic Outlook 10/10/07
Seven weeks ago markets were down across the board because in times a high volatility (like now) markets become highly correlated. As of today markets are back on top after news that the credit crunch was soon to be behind us. The S&P 500 set a new high on Friday and the DOW is back above 14,000. Resources, Industrials and Technology have led since august lows. Gold hit a new 27 year high last week. All commodities are down beginning the week of 10/8; oil, copper, gold are down causing the shares to fall of several companies connected to these commodities. Year to date, commodities across the board are strong. According to RBC Capital markets, “Commodity strength is likely reflecting more than just US dollar weakness, and that it is consistent with the containment of credit market risks to global growth.” According to Allan Greenspan, if the dollar becomes weak (problematic) then there would be an acceleration in inflation. Recession is the word on everyone’s mind. According to Gene Epstein of Barron’s, “…A recession has less than a 20% chance of occurring… The weaknesses in housing and consumer expectations are both clearly voting thumbs-down. But the two employment indicators and the stock market are holding up pretty well. And more crucially, the real rate on federal funds is relatively accommodative in historical terms”
-The Commerce Department reported that orders to factories dropped 3.3%, lowest in 7 months. (Durable goods down 4.9%, non-durable goods down 1.6%, Autos down 8.5%)
-Jobs created in August originally reported a loss of 4000 but was revised to a gain of 89,000 and 110,000 in September. ( in line with estimates)
***The fed would more likely cut rates if job creation numbers fall short. Therefore, the stock market would react more favorably if the numbers fall short.
-The dollar has touched new lows against the Looney, Euro, Pound, and Yen in the past week.


As our national research source says, “While the risk of recession increased during the August financial panic, our estimates suggest that it has declined noticeably in the wake of the Fed’s September interest rate reduction.” They further note that since 1950, the economy has been in a state of recession only 13% of the time; in the past 20 years, that figure drops to only 6% of the time. In the past 20 years, market crises clearly have greatly outnumbered the number of recessions predicted by them. Of the last 11 market crises, the market resumed an uptrend on all but two occasions. Recessions tend to share common traits we believe remain largely absent today: Unemployment rises (absent today); Stock prices fall (we’re back to old highs); Yield curve inverts (it’s resuming a more normal shape now); Consumer confidence declines (okay, we’ve got that one
present). This 12-month model, designed by our national research source, shows a 13% current chance of a recession, compared with a 25% chance in prior to September. And—this recent recession panic was not the year’s high point—that was reached in March (when it rose to a 36% chance of a recession) as jobless claims rose, energy prices surge, and the yield curve inversion deepened (RBC).