Wednesday, January 23, 2008
The markets
Where do you think the market is going? Volatility today was incredibly high. Markets seesawed pretty violently before closing up from the day before. Does this mean that the Fed interest rate cut worked? Are we out of the woods? Futures markets seem to indicate that tomorrow will open lower. Will Asia decouple from the US? I'd be interested to figure out your opinions.
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9 comments:
I think the US market will fall further - at least through the quarter - because of the "herd" effect. From the news I have read about looming mortgage default rates and current fears about bond insurer solvency (http://online.wsj.com/article/SB120112113207710911.html?mod=hps_us_whats_news), I think more bad news will erode the market gains and add to consumer fears. I think the political dsicussions about a stimulus package and Fed Rate cuts only adds to consumer gut feelings that the economy is overheated - a self-fulfilling prophecy. However, with a weak dollar, perhaps Asian markets will remain stronger? I hope so, I shifted my porfolio to international stocks!
I personally think that we will continue to see a lot of volatility throughout the year. I don't think we have seen the end to the mortgage mess. If the problems spill over into the non-subprime areas then banks might have to start writing down even more than they already have. Also, by cutting rates the Fed is focused on trying to keep the economy strong but won't this contribute to increased inflation? Also, what impact will the November elections have on the economic outlook? If a candidate who is in favor of cutting the corporate tax rate gets elected will this give stocks a boost?
Steven Lund
My feeling is that once something happens in the market, be it an earnings report, scandal, political event, it's already too late to move on it. the time to get out of the market was november of last year.
selling now goes against the principle of selling high and buying low.
i think investors got some great deals this week. start shopping!
Another interesting question is how much the Societe Generale forced selloff contributed to the Fed lowering interest rates. Remember the Fed didn't know about the selloff - and part of the reason it lowered rates was to prevent a world wide panic. But if it was reacting to one lone trader screwup, that would be funny.
With increasing chances that america might avoid ressesion, I see US markets will try to stablize at these levels(at least for a few days or till any further news). I do not see long positions opening very shortly as investor is still not clear about the trend.
As per the asian markets, I see a completely different story. With strong fundamentals, asian market should make an attempt to decouple from US markets. Although, we might experience some hiccups, I personally still remain pretty confident about the trend. Thus any major correction should be treated as an opportunity.
The bigger question that should be posed is what the mindset of the Federal Reserve is at this point? Yesterday, the Fed cut rates another 1/2 point with language leaning towards the fact that more cuts are coming. I believe we may be seeing a less "independent" Fed taking action here. It is an election year, after all. Is its primary objective to avoid recession, stave off inflation, or both? Inflation was calculated at 4.1% last year, the highest since 1990. The Fed's actions lead an objective observer to believe that fueling growth (i.e. consumption) is of primary concern over taming inflation. The weak dollar has propped demand for US goods overseas, keeping our economy humming while domestic consumer confidence continues to be shaken by the fallout of the subprime mess.
Sure, the Fed has tried to improve confidence in the market by pumping billions of dollars into the system. But with tighter lending standards post-sub prime, the multiplier effect of those dollars is lower.
Wouldn't we be better served by allowing an economic pullback and allowing prices to stabilize?
I'd have to agree with you Steve. Plus, the legislature is busy pumping Billions of dollars back into the economy. I doubt they intend to tighten their belts; likely higher deficit spending ahead. More money in people's hands + increased deficit spending + lower interest rate = increased inflation. And as you pointed out, it's already at a 17 year high.
Fed has been trying hard to avoid recession. I dont think its easy to cut interest rates by 125 basis points in a matter of few days. The govt is flushing $ 150 bn tax relief. It plans to spend in excess of $3 trillian ... and after everything that has been .. the picture still looks unclear. I do not think fed cuts would work so much now .. as the banks would be too cautious to lend at least after sub-prime mortagage melt-down.
Lowering of interest rates in posing a different problems for countries like India. The govt has been trying hard to avoid inflow of dollars to strengthen the currency. but with interest rates going down in this part of the world .. the dollars are again flowing back to india.
Strange world :-)
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