Stocks Up Slightly Day After Sharp Selloff

Traders work the main floor of the New York Stock Exchange, May 18, 2006. (Shannon Stapleton/Reuters)

This is from Yahoo News:

NEW YORK - Wall Street rebounded slightly Thursday, a day after inflation jitters prompted a selloff that saw the Dow Jones industrial average suffer its biggest one-day loss in three years and the Nasdaq composite index turn negative for 2006.

Traders seemed to be grouping after Wednesday's session, which saw the Dow plunge 214 points. They had little reaction to an unexpected drop in the Conference Board's index of leading indicators, although the reading supported views that economic growth is moderating. An upswing in jobless claims also had a minimal impact on the market's mood.

The catalyst for the previous day's furious selling was a stronger-than-forecast jump in consumer prices that ignited concerns that the Federal Reserve might keep boosting interest rates.

"I think investors are trying to figure out how much damage the Fed may need to do to growth for inflation pressures to be arrested," said Stuart Schweitzer, global markets strategist for JPMorgan Asset Management. "It's possible that the Fed has already done enough, but it's looking increasingly unlikely."

I love how the MSM spins this story as a good news story for business after the Dow had a 214-point loss yesterday. Stocks have rebounded, so gee....Everything's back to hunky-dory now. Did it ever occur to any of these business reporters that stocks have rebounded after this sharp loss because bottom feeders are picking up undervalued stocks that investors impulsively sold off yesterday?

The problem here is that the mainstream press is either burying, or overlooking, some of the deeper, underlying issues of this economy. Inflation jitters is one of the biggest underlying issues here. High energy costs have caused the CPI to rise even higher than estimated:

The Labor Department said the consumer price index rose 0.6 percent in April, while the core index, which strips out volatile food and energy prices, rose 0.3 percent for a second consecutive month.

Wall Street economists had expected consumer prices to rise 0.5 percent last month, with core prices up just 0.2 percent.

Over the past 12 months, the core consumer price index has risen 2.3 percent, accelerating from the 2.1 percent gain registered in the period through March.

In the first four months of this year, core prices have risen at a swifter 3 percent annual rate, which could raise eyebrows at the Federal Reserve.

Headline inflation has moved up even quicker due to big gains in energy costs. Overall consumer prices have risen 3.5 percent in the past 12 months and are up at a 5.1 percent annual pace since the start of the year.

Energy prices climbed 3.9 percent in April, building on a 1.3 percent March gain. Gasoline prices rose 8.8 percent in April and fuel oil costs increased 5.2 percent. Natural gas prices, however, slid 5.2 percent.

The big jump in energy prices over the last year has largely eroded whatever pay gains U.S. workers have managed to win. Over the past year, inflation-adjusted hourly earnings are up just 0.1 percent -- the first gain since last June.

This jump in energy prices would have first been absorbed by producers on a temporary basis. But as energy prices have continued to remain high over the long term, the producers would have to pass on their costs to consumers in the form of higher prices. And these high energy prices are causing a shock throughout the U.S. economy--from the acquisition of raw materials, manufacturing of products, shipping and transportation, and thus down to the retail and consumer level.

What worries me here isn't the link between inflation and high energy prices, but rather it is a link that starts with the continuing U.S. quagmire in the Iraq war, causing fears of a disruption of Persian Gulf oil supplies in a tightening oil market to result in high energy prices, which has forced prices, and possibly inflation, to increase in the U.S. economy. There is a secondary link between the Bush administration's tax cuts, and the increased government spending in the Iraq war. Looking at these current events, I'm still reminded of Lyndon Johnson's administration funding both their Great Society programs the U.S. war in Vietnam, by printing out dollar bills, rather than raising taxes. The same thing is happening here with the Bush administration--only this time the Bush administration is funding their tax cuts for corporations and rich elites, while also fighting their war in Iraq, by printing out dollar bills. We've been down this road before in the 1970s. And we seem to be heading down that same road again.