Stock and Bond Prices Sucked Down as Gas Prices Pump Up
The NASDAQ index dropped by more than three-quarters of a percent, setting it once again on a collision course from the north side with the 2000 point line with which it has been flirting off and on for weeks. The broad-based sell-off continues the trend set last week, when the equities markets began to hit the skids after what amounted to a one-day rally that had the good-times bulls coming out of the woodwork, only to get paddled by day after day of round thumpings since.
Dark Wraith CyberGlossThe NASDAQ is an entirely electronic stock market that deals primarily, but not exclusively, in the stocks of a very large number of small- to medium-sized companies.
While the bulls were getting their horns sawed off in stocks, the bond markets were taking their share of head smacking on Tuesday, too, with bond prices dropping, which pushed the yields up, especially on the longer end of the yield curve,
where prices and the associated yields tend to indicate the market's assessment of the broad, long-range economic outlook. Although there was some attempt at a rally during the day, Senate testimony by Alan Greenspan, along with other, equally joyless indicators, caused investors to run for cover, selling off bonds, thus pushing their prices down for yet another session in what has come to be a virtual day-to-day certainty that bond prices have no place to go but into the bond market's equivalent of the sewerage system.
Dark Wraith CyberGlossThe "yield curve" is a graph that shows interest rates for various Treasury bond maturities. The more the curve arches upward, the greater is the difference between the rates on long-maturity government debt and short-maturity government debt.
As far as Alan Greenspan's testimony today, it was largely more of the same scare-the-pants-off-everybody blather about the future of Social Security. His emphasis during this session was on the need to slash benefits for future retirees unless something is done right away to shore up the system. It remains to be seen if any of the ruling party legislators will take the courageous step of removing the cap on personal income subject to the Social Security tax, a change that would, by most accounts, make the system solvent until near the end of the century.
In other news, the American Automobile Association reported on Tuesday that gasoline prices across the country are within a penny of record territory, now. As warmer weather begins to set in, demand for heating fuel will decline, but this could be more than offset by increased demand for gasoline, deisel and jet fuel as Americans begin their spring and summer travels.
Should gasoline prices prove a significant deterrent to the usual upswing in travel, many businesses that service vacationers and other travelers will be hurt, which will put more downward pressure on the economy. The already ailing auto manufacturing sector may see yet more soft earnings, as might passenger airlines, and perhaps even the hotel and restaurant sectors. If enough industries become entangled in adverse consumer reaction to the never-before-seen gas prices, job losses and a general slowdown in business activity will almost certainly follow, and the economy will be hard pressed to avoid recession, despite the complete absence in the mainstream media of that word from the list of possible outcomes of the current economic trends.
Dark Wraith CyberGlossA price increase in one sector of the economy hurts consumers only to the extent that they cannot substitute something else for that product when its price rises. The extent to which people can and will switch away from a product is called its "price elasticity." Necessities tend to be very "price inelastic," generally speaking.