Financial Market Update
StrategicPoint of View®
February 22, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
Federal Reserve Chairman Ben Bernanke surprised Wall Street on Thursday night by raising the rate the Fed charges banks that borrow from the central bank. Core inflation was tame, although medical and energy costs climbed more dramatically. Manufacturing and industrial production jumped while housing starts rose.
S&P 500: 1109 (up 3.1% for the week and down 0.54% on the year)
Dow: 10,402 (up 3% for the week and down .25% on the year)
NASDAQ: 2244 (up 2.8% for the week and down 1.10% on the year)
10-year: 3.68% (from 3.54% last week)
Crude Oil (March): $79.81 (from $73.58 last week)
Gold (April): $1,109 (from $1,090 last week)
USD/Euro: $1.3614 (from $1.3636 last week)
THIS WEEK
The Credit Card Act of 2009 takes effect on Monday offering some protection against rising rates and fees. Monthly updates include: consumer confidence, durable goods and home sales. We hear earnings reports from Target, Macy’s, Newmont Mining, Home Depot and Lowe’s.
COMMENTARY
The market is terribly moody as of late, and market moods matter.
Humans, on the other hand, can be happy or sad, pessimistic or optimistic and their disposition doesn’t often affect their financial well being. For instance, if I am worried about job security, I may have trouble sleeping, complain of stomach aches and appear distracted, but my lifestyle doesn’t really change unless I lose my job. And if I feel confident that I am going to get a raise, I may smile and laugh a lot, but if I don’t get that raise, I can’t spend more money.
When markets worry, these worries may translate into price decreases, which affect investors whether or not the worries ever transpire. It works the same for hope. The economy wasn’t really recovering last year, but the markets were optimistic that it would, and celebrated with a nine month rally.
Fortunately for us, the markets were in a good mood this past week, rising over 3% and erasing most of the year-to-date losses. The bounce-back came primarily at the beginning of the week, as previous worries were put on the back burner. Europe agreed to postpone any meaningful action on its sovereign debt crisis while investors began to adjust to China’s gradual monetary tightening. In addition, the underlying U.S. economic news was very strong – reinforcing the case of a steady, albeit slow, recovery.
Then along comes the Federal Reserve with its surprise announcement Thursday night: it is raising the discount rate by 0.25% and reducing the length of borrowing from 28 days to overnight. The market response? Nonchalance.
We liked that reaction: it could have been a lot worse. The Federal Reserve has been talking of an exit strategy for many months now – how to take back the money it has put into the economy in order to help control the spiraling deficits. If the market had seen the changes in the discount rate as the first move in a series on monetary tightening steps, it could have started to worry.
The discount rate is the rate the Federal Reserve charges its member banks to borrow money. Before the credit crisis, most banks would never have borrowed from the Fed – it was considered a stigma and a confession that the bank couldn’t get money anywhere else. When the crisis unfolded, the Federal Reserve lowered its discount rate from 1% above the Fed Funds Rate (that is the rate that banks borrow from each other and the one we always hear about) to .5% in the hopes that banks would use the Fed window to pump money into the economy or their own reserves. And they did. But now bank borrowing has retreated and the Fed is seeking to return to “normalcy,” confident that it can reduce access to money from its central bank and not damage the banking system. Bernanke made it clear that this decision was unrelated to future monetary tightening policies.
On Friday the market bought into the “return to normalcy” argument.
Baby steps: that is the goal of the Federal Reserve. Tell everyone what you are going to do. Say it over and over again. Make sure every step is incremental. Don’t shock the system. And more than anything else, calm concerns that any policy decision will cause immediate harm to the economy.
We hope this strategy works. But sometimes you just can’t stop the market from worrying – whether it’s warranted or not.
Tune into the “Making Money” Show Weekdays at 5:30pm and Saturdays at 9am on AM790 WPRV or through our website, www.StrategicPoint.com.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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