Investors Expecting Fed to Cut Interest Short-Term Rates

Dow Up 2.5% For the Week -- Best Week Since April

September 16, 2007
By: Jerry Cole - Retirement, Investment

Despite oil hitting $80.00 a barrel this week, the market had its best week since April. The Dow Jones Industrial Average was up 2.5% for the week, closing Friday at 13442.52. The industrials are now up 7.9% for the year.

High energy prices are usually bad news for the market because they cut into consumer spending and corporate profits. In fact retail sales for August were slow. Overall retail sales gained 0.3% in August as reported by the Commerce Department, but excluding the promotion-driven surge in auto sales, retail sales fell 0.1%. Gasoline sales fell as a result of pump prices.

The turmoil in the credit markets has now become global. In England, one of the country's biggest mortgage lenders, Northern Rock PLC, was trying to calm customers about a news report it had turned to the Bank of England for help keeping its business afloat. Northern Rock did confirm that the Bank of England would provide short term funding to alleviate a "severe liquidity squeeze."

At the same time, the University of Michigan's index of consumer sentiment for early September rose to 83.8 from 83.4 last month, The uptick shows resilience in consumers' views of both current and future conditions. Sales of autos were up a full 2.8% in August as dealers offered discounts for newer models. The Commerce Department said the nation's trade deficit was down slightly in the second quarter because sales of U.S. exports grew.

So, as often is the case, there are opposing conditions that make it difficult for the Federal Reserve to make the right move regarding interest rates. We will know the result of their thinking on Tuesday when the Fed Open Market Committee meets. Based on last week's up move in the market, it seems that investors are expecting a cut in the Fed's benchmark short-term interest rates. The recent developments in the financial markets and their possible long-term effects would argue for a cut.

In times of market turmoil people look for safety and a constant, reliable stream of income. There are some good products out there that will provide these features. They are offered by insurance companies and come in the form of immediate fixed-income annuities and whole life insurance. The caveat to these products however, is that the risk of inflation will erode the value of the returns over the long term. Depending where you are in the life cycle, you will need growth investments, such as stocks to offset the effects of inflation.

Immediate fixed-income annuities are contracts in which an insurer promises to make equal periodic payments for life, in exchange for a lump-sum investment. The payouts are set by actuaries according to age, gender and premium. To support the contracts, insurers generally invest mostly in long-term bonds and mortgages. The return to the individual includes both interest and principal.

The contracts are only as reliable as the financial stability of the company issuing them. So you have to look at the ratings of the company as issued by Standard and Poors or Moodys. You have to be aware of the expenses woven into the contracts as they can make a significant difference in the rate of return. Also, it is of paramount importance to know what the surrender charges are and how long they apply. People have changes in their lives! They often find they have a need for a lump-sum of money, only to see a very large charge for getting their hands on it.

Be careful in your planning. The details in your investment can have long lasting effects.

I invite your questions.

(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)