Schwab Market Outlook--it's 1995's slowdown again......

[Gloria]

http://www.schwabinsights.com/mktoutlook.html

MARKET OUTLOOK
The Katrina Factor

By Liz Ann Sonders
Chief Investment Strategist,
Charles Schwab & Co., Inc.

The devastation and human toll that Hurricane Katrina has left in its wake is nothing short of tragic. Katrina’s impact also looms large on energy prices, economic growth and even Federal Reserve policy. As the process of rebuilding begins, the implications for investors will unfold. And critical to that story’s end will be the outcome of the Federal Reserve’s next meeting on September 20.


SNIP

The Fed: in a pickle
The Fed’s in a bit of a pickle right now. Energy prices had already begun to crimp economic growth pre-Katrina, and $3–$4 gasoline prices certainly aren’t helping now. However, the Fed doesn’t eye only economic growth but also, and more importantly, inflation. As September 20 approaches, the Fed will have to assess the ripple effect of higher energy prices as costs associated with air travel, trucking, transportation and storage infrastructure all edge higher. In the meantime, most of the data on which the Fed relies will be pre-Katrina, supporting the theory of a Fed pause, even if only temporary, as the central bank awaits more concrete evidence of inflationary pressures.

The economy: slowdown, not recession
Regardless of imminent Fed policy, we feel that an economic slowdown is in front of us. From a market perspective, there is a big difference between how stocks typically perform in an economic slowdown (or soft landing) and in a recession (or hard landing). We are still relatively confident that the slowdown, which was already unfolding prior to Katrina, will be of the former variety.

The market: 1995 redux?
So what would a soft landing mean for the stock market? We have one fairly recent example of a mid-cycle economic slowdown to use as a gauge for the stock market’s reaction. As you can see in the table below, in 1995 we had the first successful instance since 1965 of a soft landing that followed a rate-hike cycle.

Ultimately, we think this slowdown will look very much like 1995’s. Yield curve trends and oil-price spikes are similar. In addition, long-term rates remain very low, consumer spending hasn’t faltered significantly, and repatriation of foreign profits and pent-up capital-spending demand should support the recovery in business spending—all of which should help prevent a hard landing.

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[corkhead]

1. lipstick on a pig

sounds like a bunch of wishful thinking to me.