Friday, July 28, 2006

Stocks Rally as Growth Slows

Today's unexpectedly low GDP figure caught many economists by surprise. The "advance" estimate for second quarter growth was only 2.5%. The figure didn't surprise me, however. After all, just a few weeks ago on Kudlow & Co., I predicted 2.5-3.0% growth.

I am surprised, however, by the stock market's reaction. We have slowing economic growth and rising inflation. Yet the market responds with a strong rally. Why? Because the latest GDP data increases the odds that the Fed will pause at its August 8 meeting.

Investors are being myopic. The end of interest rate increases is good news, but not in the face of slowing growth and rising inflation. The Fed may pause, but it's also likely to continue hiking rates in the near future if inflation keeps rising. I'll have more to say about this in the August issue of the Forbes Growth Investor. In the meantime, you can read Beware The Stagflation Set Up, which I wrote for