August 23, 2006

Stock Market Goes to Pluto

Judging by Media headlines, after a long hot summer for our Nation and the rest of the world, things began to improve last week. On Wednesday, as we sipped our morning beverage, and opened our daily newspapers, we were greeted by a headline story that was quite different than what we were accustomed to reading over the past couple of months. Lo and behold, it wasn’t a story about the conflict in Lebanon, or about the sectarian strife in Iraq, or rising oil prices and rusting pipelines, or runaway inflation or rising interest rates, or terror in the skies, or oppressive deadly heat----it was a story about Pluto. Pluto???

Admittedly, I have traveled far out of my comfort zone in writing about Astronomy. So, to put it into more Wall Street like terms, I give you this----Some analysts feel a need, based on fundamental analysis, to downgrade Pluto to a lower exchange. Other analysts, focused on new technologies, are on the verge of upgrading Ceres and Xena to the marquee exchange.

As the week progressed this new Media momentum continued. The Pluto story was replaced by stories about a possible resolution in the JonBenet Ramsey case. Did John Karr commit the crime? Is he believable? The talk around the Nation’s water coolers was of nothing else.

AND THE STOCK MARKET SOARED

Similar to the icy surfaces of Pluto, the nation cooled off-----and the Stock Market soared. Oil prices plunged, inflation fell, interest rates dropped and the Stock Market had one of its best weeks in years.

DOES PLUTO HAVE ANYTHING TO DO WITH THE RALLY?

Absolutely—Definitely! In the short-run, markets are often fueled by irrational behavior. Anything and everything can move them. Fear and worry normally trump rational thought. When headlines returned to topics of general interest and the horror stories seemed to retreat, the market was able to respond rationally to positive economic and business indicators.

IN THE LONG-RUN FUNDAMENTALS ARE THE DETERMINANT

In the long run, markets are very rational and follow along with economic fundamentals. And, indeed, the fundamentals of our economy continue to look good. Profits and balance sheets of most businesses are excellent; the economy looks like it’s cooling down from what may have been an overheated situation, fueled by low interest rates; the Fed has paused after raising interest rates over the last 18 months; and inflation, while a concern, still seems under control.

SO LET’S HEAR IT FOR OJ, BRITNEY, JONBENET AND PLUTO

In my view, with the country’s Real Estate market either temporarily stalled (at best) or outright reeling, the Stock Market will regain its title as the best hedge against inflation.

Much like Pluto, the Stock Market had been knocked off its perch after rampant speculation in Technology and Internet stocks resulted in the Stock Market crash of a few years ago. Then, following 9/11, Alan Greenspan lowered interest rates to unprecedented depths, fueling a Real Estate boom of historic proportions.

However, these are different times. It’s time to wake up and smell the coffee and understand that we have entered a brand new economic cycle—a more normal cycle.

The Real Estate boom is history; the stock market crash is history. And when you smell your coffee and open your newspaper let’s hope the headlines will be lighter and will continue to focus on the issues that are really important to Americans…Britney, Angelina, JonBenet, or even Pluto. That’s what I call getting back to normal!

Austin A. Frye, MBA, JD, CFP®

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