Banking News Not As Bad As Expected

The result was a 256.80 point move up by the Dow Jones Industrial Average.

April 20, 2008
By: Jerry Cole - Retirement, Investment

Something good, and a bit unexpected, happened this week in the market place. What with all the negative media attention given to companies in the financial sector over the last year because of credit problems caused by the subprime lending practices, many investors were prepared for the worst when banking giants reported their earnings this week.
But, as often happens, when the news isn't as bad as it could have been, as was the case on Wednesday when J.P. Morgan Chase and Wells Fargo reported, investors get excited and trigger a rally. The result was a 256.80 point move up by the Dow Jones Industrial Average.

Then on Friday, Citigroup, one of the Dow Jones Industrial Average's 30 component stocks, rose 4.5%, notwithstanding reporting a $5.1 billion loss. This was on the heels of a $9.8 billion loss reported in the fourth quarter of last year - precipitated by more than $18 billion in various credit related hits. The Citigroup gain was one of the main catalysts that caused a rise of 228.87 points in the DJIA on Friday. So go figure!

To be sure, the market often exhibits a psychology that is contrary to the prevailing economic conditions at the time. That is why it is virtually impossible to time the market. Market psychology can be described as the overall sentiment or feeling that the market is experiencing at any particular time. Greed, fear, expectations and circumstances are all factors that contribute to investors overall mentality or sentiment. You also have to consider that, at any given time, the market is reflecting what the future may hold.

The gain on Friday was the blue chip's fourth in a row, leaving it up 4.3% for the week, although it is still 3.1% in the red for the year. Meanwhile, other parts of the economy are reporting strong results. Google and Caterpillar reported solid earnings on Friday. This was after IBM posted a 26% jump in profit as gains were led by its services business and surprising strength in the U.S. where revenue rose 6%. IBM put out a bullish forecast after reporting its results.

The question now is will the overall results in earnings for the first quarter be enough to turn the market around? Investors will have seen enough by the end of next week to determine if the string of encouraging earnings reported so far is real and stocks can weather the credit crisis and economic slowdown.

Many say we are not out of the woods yet. There will more than likely be further write-offs in the financial sector. Some companies are planning further lay-offs. Crude oil is at a record $116 a barrel. There is global turmoil over food prices that could lead to panic buying and spark inflation. Consumer sentiment remains pessimistic.

So remember to keep your risk within your tolerance and keep ahead of inflation.

I invite your questions.

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