The month started off on a good note with the unemployment report. U.S. unemployment had dropped to 4.1%, the economy had added 310,000 new jobs, while the all important hourly wages number came in at a less then expected 0.1%. The Producer Price Index (the "PPI"), which measures inflation on the producer level, dropped 0.1%, while the core PPI, which excludes food and energy prices was up 0.3%. The Consumer Price Index (the "CPI"), which measures inflation on the consumer level, rose 0.2%. Productivity, a measure of the relationship between units produced versus cost to produce them, showed a strong gain of 4.2%. The other key economic indicator GDP, which measures economic growth, rose 5.5%. By now your asking what all these numbers mean. The numbers reaffirm the view of strong economic growth with low inflation, which bodes well for the stock market.
The Federal Open Market Committee meeting went as expected. The Fed raised rates for the third time this year, and adopted a neutral bias. The market reacted positively, assuming that the Fed was done raising rates for the remainder of the year. The yield on the long bond dropped on the news only to rise back to it's recent high's by the end of the month. The rising yield could prove problem some to the market, as it would jeopardize the third component of the new economy theory, strong growth, low inflation and interest rates.
December should prove to be an interesting month. Investors will have to grapple with the decision on whether to buy or sell in anticipation of Y2K. The end of the month will bring the start of earning warning season, and of course there is the FOMC meeting. The key economic indicators to watch are employment and wage inflation indicators. Some Fed officials have indicated that wage inflation is the indicator they're watching most closely. The reason, increasing wages needs to be passed through somewhere, and theirs three ways to do it. The best way is through productivity gains. The two worst ways, is by absorbing the costs internally, which will cause earnings to suffer, or passing it through to the consumer which would cause a rise in inflation. The first of the important indicators for December, the wage inflation number in the unemployment report, came in again at a lower than expected 0.1%, helping the market rally. Still showing that wages aren't creating inflationary pressure. The CPI and PPI are, as always also important to watch.
The NASDAQ should also be watched carefully. It is up over 60% for the year, and doesn't seem to be coming to rest anytime soon. But inevitably it will correct, and many of the high flyers that have helped the NASDAQ rise in the recent leg up, will suffer significantly. Investors should take some, not all, money off the table in some of these high fliers. This way, investors will be ready to take advantage of lower prices when a correction does take place.
Continue investing your money, especially in high tech stocks that have been effected by the Y2K spending slowdown. These companies will bounce back after the beginning of the year, once investors realize that the slowdown was due to one quarter event related to Y2K, rather than a slowdown in business. The Fed will leave rates and their bias unchanged, thanks to favorable economic news that have shown low inflation growth.