The Market's Mixed Message

Even if you're a hard-core shopaholic already pondering which stores to hit first on Black Friday, you might be having the willies after last week's headlines.

The Dow Jones industrial average resembles a yo-yo, rising more than 100 points one day, tumbling more than 350 the next. The dollar seems to be in a slow-motion crash. It has plunged 9 percent this year to a record low against the euro. Oil prices have surged near $100 a barrel, fueled partly by speculative worries of war with Iran. Home prices, rather than finding a bottom, seem to be in free fall, dropping at an annual 4.4 percent pace, according to the latest data. Then there's the soaring cost of gold, for millenniums the harbinger of financial chaos. Prices of the yellow metal are at their highest levels since January 1980.

About the only people who still see the glass half full are Chairman Ben Bernanke and his colleagues at the Federal Reserve Board. They propped the market up on Halloween with a treat of a quarter-point drop in the overnight bank lending rate to 4.5 percent and also pumped in $41 billion to help steady the credit markets. The Fed explained the rate cut in a statement that said the following in a nutshell: "Credit markets stable. Economy and inflation stable. We're done. Mission accomplished."

But the happy talk was interrupted by panic on Wall Street, as traders digested news of more trouble at the world's big banks resulting from the ongoing credit crisis. One day, it was rumors that Citibank might have to sell assets or cut its dividend to make up a shortfall stemming from losses related to subprime mortgages. The next, concerns that the credit woes might not be contained to the banks but include insurers and other financial firms. "What you've seen is credit fears resurfacing," says Zoltan Pozsar, senior economist at Moody's Economy.com. "I wouldn't say the severity of what's going to come will be as big as what we saw in August, but the markets are definitely going to stay jittery for some time."

The readings from Main Street, though, seem jollier as consumers head into the holiday season. The economy did turn in its best back-to-back quarters in four years, booming 3.9 percent in the July-through-September quarter. And the week ended with a better-than-expected report from the Labor Department that the economy added 166,000 new jobs in October, twice as many as economists had predicted. And those jobs continue to pay pretty darn well, with wages rising at a solid 3.8 percent annual rate last month.

"This economy is not going to hell in a handbasket," says John Silvia, chief economist at Wachovia. "The probability of a recession is very low." He expects growth to dip to 2 percent this quarter before rebounding to around 3 percent next year as the housing market becomes less of a drag. "And I think that's what the Fed expects, too," he adds.

Fill 'er up. Of course, more and more of Americans' dough will be going to fill up gas tanks, and if oil prices remain high, that could potentially shackle the broader economy. But it might not be so bad. As economist James Glassman of JPMorgan Chase notes, consumers already saw something like $100-per-barrel oil this spring, when large numbers of refineries shut down for maintenance and gasoline prices spiked above $3 per gallon. And while oil may be a "tax" initially for consumers and a net gain for oil-producing countries, all those hundreds of billions of dollars in oil revenues largely get recycled back into financial assets such as U.S. stocks and bonds. What's more, the high prices may not last. "It's a bubble," says Fadel Gheit, an oil and gas analyst with Oppenheimer. "The only question is, How high is it inflated? Is it [by] $20 or $50?"

And there's even a flip side to the dollar's slide: For now, it is helping offset the housing downturn by boosting U.S. exports.

To be sure, plenty of economy watchers think the Fed is behind the curve and needs to keep cutting. David Rosenberg of Merrill Lynch, a firm whose CEO just "retired" after subprime losses devastated its earnings, thinks the economy may well crumble under the weight of a quadruple whammy of woes: "The consumer is on the precipice of experiencing [his] first recessionary phase since 1991—the last time we had the combination of punishingly high energy prices, weakening employment conditions, real-estate deflation, and tightening credit conditions."