Donald Luskin writes that with S&P 500 index only <6% below its all-time high (a 10% drop counts as a mere market “correction”), the market is still bullish, and this is not the time yet for government intervention. He also reminds us of Bernanke’s 2002 speech, where he said that the interest rate is a tool for regulating economic growth in the long term, not for giving short-term relief to the market every time it slips.

Many do not share Luskin’s optimism on market conditions today, and they do not need to look up charts. The current credit crunch and housing crisis have stressed the investing environment, and it feels particularly hard coming right after the boom over the preceding year.

But this is not a recession yet, and until the overall economy is threatened, the Fed has no reason to step in. I agree with the conservative sentiment that the investors must own up responsibility for their action, and it is not the government’s (and hence the taxpayer’s) job to bail them out. But it is the government’s job to ensure the investors are not duped by reckless actions of private enterprises, as the subprime mortgage mess today shows.

1. Rising oil prices. High energy cost triggers fear of inflation, and Federal Bank typically counters by raising short-term interest rates, which deflates stock prices. Oil price has soared 20% so far this year.
2. Rising Treasury yields. As the yield of 10-year Treasury notes rises sharply, investors often turn away from stocks in favor of the security of notes and bonds. The yield has not changed much this year yet.
3. Falling number of growing stocks. If the broad indexes are being pulled up by only a few large company stocks, while others are falling around them like ninepins, that cannot be a good sign. Over the last few weeks, almost four times as many stocks hit 52-week lows as highs.
4. Falling consumer spending. If we buy less, it stands to reason that the product-oriented industry will suffer. Retail sales dropped almost 1% in June, and the continuing housing market crunch can force consumers tighten their money-belt even further.
5. Falling corporate earning growth. If corporate earning slows, the market will slow down as well. Low productivity growth, inflation fears, high long-term interest – all of them dissuade companies from borrowing money. We won’t know till 2007 earning reports are out.

In short, we do not know. Even though this type of analysis is better than those based on charts alone (the so called “trend analysis”), predicting the future based on past events is still notoriously difficult, if not impossible. The only certainty about the market is in its past, a classic example of “hindsight being the perfect science”.