Stock Market Reacts After Fed Reserve
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Sometimes when you give the baby a piece of candy to stop its crying, it will take a bite and be quiet for a moment and then resume its fit. That is what the market seemed to act like on Wednesday after the Federal Reserve lowered the federal funds rate (the rate banks charge to borrow from each other) by half a point to 3%.
Immediately after, stocks jumped, putting them on track to gain for the third straight day. However, in the last hour of trading, stocks tumbled as Fitch Ratings said it was down-grading Financial Guaranty Insurance Co. to a double-A rating from a triple-A rating. Such a downgrade may hurt the value of certain bonds the company insures, creating losses for the holders. This was followed by reports that MBIA and Ambac Financial Group, two other major bond insurers, were facing billion in losses. The news roiled the markets, and the Dow Jones Industrial Average, which was up as much as 201 points, ended the day down 34.47 points.
Cooler heads prevailed on Thursday and Friday, with the Dow rising 207.53 points and 92.83 points respectively, to finish the week ahead 4.4%. That is no small potatoes and was the Dow's best weekly performance since March 2003 when the Dow was shaking off the pessimism of the dot-com bust. Yet, even after its second winning week in a row, the blue-chip average is still down 3.9% for the year.
To be sure, there are plenty of negatives out there for investors to fixate on. Friday the Labor Department reported that non-farm payrolls declined for the first time since 2003. And, the subprime debacle continues to ensnare more participants in its non-performing mortgages web. Now Federal criminal prosecutors in New York are investigating whether UBS AG misled investors by booking inflated prices of mortgage bonds it held despite knowledge that the valuations had dropped. The SEC, seeking to determine if UBS and Merrill Lynch improperly mis-priced mortgage securities, recently upgraded its probes to formal investigations.
After all someone or something has got to be to blame! Right? Never mind that avarice and greed have always permeated financial markets - and likely always will. Add to this the hubris that many financial institutions practice, and you have a formula for the type of disaster that Societe Generale experienced a week ago. In that instance, Jerome Kerviel, a low level trader at the bank, was able to tweek the system so as to put up bets the size of the whole bank's net worth! This resulted in a $7.2 billion loss, far and away the largest ever by a bank. Edward Yardini, a respected American economist who runs an investment strategy consulting firm, thinks Mr. Kerviel's deed helped accelerate a market slide that prodded the Fed to slash interest rates.
Meanwhile, we can expect continued market volatility. The media will be full of news regarding the economic slow-down. There will be much discussion about whether or not we are in a recession or heading for one. What you can bet on is that the market always seems to be ahead of the news. Indeed the market does seem to always be looking ahead, but isn't that what we all do when we decide to invest in the first place?
So, remember to keep your risk within your tolerance and keep ahead of inflation.
I invite your questions.
Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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Jerry Cole - Retirement, Investment |
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