While an upward trend in the stockmarket has clearly emerged, investors remain jittery. The market is now convinced that the US Federal Reserve will not act until its next Federal Open Market Committee meeting in late August. Federal Reserve Chairman Alan Greenspan told the Senate Banking Committee last week that the economy is slowing to a more sustainable pace. This means that the Fed will spend the next six weeks watching the economy to see whether its 1.75 percentage point rate increases over the past year have had the desired effect. Yet, the Fed may be forced to tighten more in the fall.
Consumer spending remains a cause for concern.
A decline in retail sales in April has proved to be a fluke, and in May and June consumers have returned with a vengeance. Higher rates have not yet slowed down the pace of car sales, for instance. Stock investors remain jittery, and rallies have been interspersed with profit-taking whenever investors feel that the Fed has ammunition for another tightening. At the same time, another danger is a hard landing, and Wall Street is also watching the impact of a possible economic slowdown on corporate profits. Profit warnings result in a savaging of stock prices.