Friday, April 13, 2007

The Friday Stroll Through the Archives

This week for our look back at recent economic history I thought I'd share a simple little piece from the news wires in 1990. It's nothing more than a typical report about the previous day's stock market activity, actually. But it makes a nice point.

This version of the story is from the St. Petersburg Times (because I like the headline they chose), May 12, 1990:
Economy brings out the bulls

The stock market rose sharply to near-record heights Friday in an exuberant reaction to favorable inflation news and falling interest rates. Trading volume picked up to its heaviest pace of the year as the market extended a two-week rally.

The Dow Jones average of 30 industrials climbed 63.07 points to 2,801.58, its highest close since it hit 2,809.73 on Jan. 3. Over the past 10 sessions the average has risen 156.53 points, or 5.9 percent.

Advancing issues outnumbered declines by more than 7 to 2 in nationwide trading of New York Stock Exchange-listed stocks, while volume hit 234.04-million shares the largest total since a 240.39-million-share day Dec. 15.

"Money's coming into the market," said Peter G. Grennan, senior vice president of Shearson Lehman Hutton. "You don't want to be left on the sidelines on this one."

The surge followed a series of reports pointing to stable interest rates and inflation.

Friday morning, the government reported that the producer price index of finished goods dropped 0.3 percent in April, in contrast to Wall Street's expectations of a 0.1 percent to 0.3 percent increase. Separately, the Commerce Department said retail sales fell 0.6 percent last month.

Analysts said the figures provided the markets with a double dose of evidence that economic growth remains slow enough to subdue inflation. That served to allay whatever fears persisted on Wall Street that the Federal Reserve might move soon to tighten credit.

Maury Harris, chief economist at Paine Webber, said stock prices were strong "because interest rates are down, commodity prices are down, producer prices are down and so are retail sales. So stock and bond prices went up because investors are less worried about inflation."
For context, here's a picture showing how the economy did in the months after May 1990.

The thing that I like about this story is the reminder not to rely overly much on the stock market for cues about which way the economy is headed. The statement "the stock market is near record highs" is no evidence that the economy is headed in the right direction.

Incidentally, it also reminds us not to be surprised if we see a bit of a (temporary) stock market rally this year as evidence comes in that inflation is slowing and the prospects for an interest-rate cut grow. In fact, I'd suggest that such a rally is quite likely (and perhaps we're in the midst of it right now). But as a corollary, it's worth keeping in mind that such a rally is not necessarily evidence that there's no reason to worry about the economy.


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