The long, hot summer is over and many in the financial markets will say good riddance. There was no summer rally, only light buying and selling, and a heavy mood of pessimism.
But now Labor Day is past, vacations are over, the pools are closed, and a bit of bounce may be returning to markets. And none too soon. The markets had been pounded by drought, higher interest rates and inflationary fears. Some feared another crash.
The new sense of hope is not merely associated with the calendar. It stemmed from an honest-to-goodness report that the economy was slowing down. That was contained in the August employment report released Friday.
HARBINGER OF BETTER TIMES
The slight rise in the unemployment rate pleased the financial markets because it was seen as noninflationary. It meant that Alan Greenspan, Federal Reserve Board chairman, wouldn`t have to raise interest rates any more for a while.
”You are starting things on a more positive note,” said David Jones, chief economist at Aubrey G. Lanston & Co., a government securities firm in New York.
It is hoped that the 52.28-point rise in the Dow Jones industrial average Friday will be the harbinger of better times ahead in the financial markets, with volume and stock values picking up.
INTEREST RATE DECLINE?
If the bond market is any sign, things should be rosier. Thanks to the jobs report, U.S. Treasury bonds rallied strongly last week. The effective yield on a 30-year bond closed at 9.06 percent.
That`s quite a turnaround from the mood of a few days earlier, when analysts were worried about 10 percent bonds.
There are some who feel that it might be reasonable for Greenspan to consider a decline in interest rates, because the jobs report appeared to indicate the economy has slowed to a manageable pace.
But that`s probably premature. As a rule, one government report isn`t enough to persuade a skeptical central bank to change direction. The Federal Reserve Board is cautious about these things.
A SCARY SUMMER
It was a scary summer because the markets saw nothing but a disastrous trend. They feared that the dollar`s strength, for example, would cause the Japanese to raise interest rates to protect the yen`s value.
It was a potential scenario that had ”crash” written all over it. A worldwide rise in interest rates would bring a financial market crack, possibly beginning in Tokyo and spreading to the rest of the world.
But Friday brought a lower dollar, and a substantial easing of financial tensions, along with a better mood in international markets.
DON`T BREATHE TOO EASILY
But the U.S. isn`t out of the woods yet, said Jones. ”You`ve still got a fair amount of inflation, with these food price increases,” he said. ”In addition, there are commodity price increases to worry about.”
