Investors have gained renewed enthusiasm for their concerns about a continued slump in the economy. Despite a 25 per cent rise in Intel’s second quarter earnings and a drop in oil prices, the Dow gained downward momentum Tuesday (July 15) dropping below 11,000, to a close of 10,962. This is over 3,000 points below the Dow’s record close in mid-2007, just over 14,000.

Along with uncertainty about credit, housing, oil, gas, and food prices, growing concern about inflation conditions prompted Fed Chief Ben Bernanke to warn of more potential problems. A new Labor Department report showed wholesale price climbed by 9.2 per cent for the 12 months ending in June. This is an incredible pace, driven largely by food and retail gas spikes. This was the largest 12-month price increase in wholesale prices since 1981.

Some of the news today was especially alarming considered recent commentary from both government and economic figures suggesting potential improvement in the economy. Concerns are once again that a condition of serious stagflation could be in the forecast in the near future. With mounting inflation, combined with renewed concerns about the economy, a paradox emerges.

Perhaps the most disheartening news of the day was that retail sales dropped to a four-month low. This was especially frightening given the robust tax stimulus package that put extra cash in the pockets of Americans in the last few months. Poor retail sales would suggest consumers have been forced to spend extra money on gas and rising food prices, or have saved the money for emergency needs. Regardless, it is not good news for the Fed which had indicated a cease in rate cuts at its meeting last month, driven much by the hope that previous cuts and the stimulus were preparing the economy for a boost.

Now, with the economy still looking to be hurting, the Fed is in a quandary. If it cuts rates to continue to drive the economy, it risks worsening an already weak dollar and frustrating already angry Americans with higher prices. The Fed certainly faces a tough few months ahead.

Banking and automotive sectors are especially burdened. Automakers are facing serious drops in demand due to restricted spending. Fannie Mae and Freddie Mac have been hammered in the stock market as anxious consumers are reaching a boiling point with concern about losing their savings and investments if the federal banking system fails.

The dollar plunged against the yen and reached a new all-time low against the Euro. This was despite a $6 drop in oil, which would normally correlate with a rising dollar. Today’s oil dip was more a case of oil speculators fearing worsening economic conditions in the US will prompt dramatic reductions in fuel demand. Thus, oil and the dollar suffered in unison as investors and consumers grow leery.

Most analysts believe that in spite of his harsh criticism of inflation, Bernanke, and his central bank counterparts, are likely to leave rates unchanged for the rest of the year. Previously, it was discussed that the Fed might move quickly to raise rates to counter inflation, when it felt the economy was safe. However, the Fed has long maintained the economy was paramount until it was out of the woods, unless inflation reached a breaking point.

Market Recap

Stocks dropped Monday as financial concerns once again ruled the day. The Dow dropped 45 points as it closes in on a drop below 11,000. The NASDAQ and S&P were down 26 and 11 points. Oil hovered around $145 at the close and the Fed adopted its plan to curb unethical mortgage lending. The dollar is weaker as the Euro is moving toward its all-time high above $1.60. The Dow pierced through 11,000 Tuesday, to close at 10,962. The NASDAQ gained 2, but the S&P was down 13 points. An oil drop and good earnings from Intel could not overcome growing economic and inflation concerns. The dollar continued to dip lower.

Neil Kokemuller
Tuesday, July 15, 2008
10:51 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

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