Stock Volatility Continues

Yesterday was another day where investors were bullish and today's futures point to another higher opening. The consumer confidence number has brought some new life into the market. Rising rates, higher commodity prices, and elevated gold prices doesn't seem to bother stock buyers.



We are pleased to see stocks go higher even though we remain very cautious. The bulls say rates are rising because the economy is getting stronger and higher commodity prices are a result of expected improving industrial activity.



We believe that interest rates are up because the government needs to raise trillions of dollars in the treasury market to fund the stimulus plan and all the programs implemented to avert a financial crisis. The Fed is printing money, the monetary base is growing, and the fear of inflation has been driving gold prices higher.



We like commodities for two reasons. Precious metals are appealing if one believes inflation is around the corner and some commodities like silver also would benefit with an improved economy. Farming related commodities could rise as farmers struggle to get enough bank credit to plant their crops. A lack of loans to the farming industry is likely to restrict crop production and thus cause prices to rise as the supply demand imbalance ensues.



As treasury prices decline, concern could grow with the U.S. dollar. A weak dollar is likely to push oil prices higher while also driving gold up. Rising energy prices could choke off the mild economic improvement we are seeing and then stock prices will reverse direction, quickly. A declining stock market is also likely to reverse consumer confidence.



We believe there was a chain reaction that has added to the bullish sentiment in the markets. Stocks took a dive through the beginning of March. The oversold condition led to a huge rally. Higher stock prices resulted in higher consumer confidence and higher consumer confidence led to even higher stock prices.



We are not convinced that this chain event will continue. Rising unemployment, weak corporate earnings, lower housing prices, and higher gas prices could lead to lower consumer confidence. Lower consumer confidence leads to reduced spending, minimal inventory replacement, declining corporate profits, and lower stock prices. If we add higher interest rates to the mix, misery will be ubiquitous and holding cash and gold will be the best investment strategy.