Don’s Outlook 10/8/08
U.S. stock markets booked another losing session on Tuesday, the second full day of trading in the wake of President Bush’s signing of the Emergency Economic Stabilization Act of 2008, the controversial $700 billion measure designed to provide relief to the beleaguered financial sector. Since last Wednesday, the Dow Jones Industrial Average has shed nearly 13 percent of its value, the steepest drop for the index of 30 blue chips since the terrorist attacks of September 11, 2001. The broad market S&P 500 is holding onto a five-day loss of 14.6 percent. As brokerages, retirement plans and mutual fund companies mail out quarterly statements, individual investors—and not large institutional players—seeking the safety of cash have been the primary force driving the markets lower.
A coordinated interest rate cut by some of the world’s largest central banks helped stocks recover some lost ground in early trading this morning. The Federal Reserve, the Bank of England, the European Central Bank and central banks in Canada, Switzerland and Sweden all cut their prime lending rates in an effort to jump-start the stalled credit markets. The Fed cut the federal funds rate by 50 basis points, to 1.5 percent, and the ECB made a similar adjustment to the benchmark rate on the euro. Although the Federal Reserve wasn’t scheduled to convene its interest rate-setting Federal Open Market Committee until later this month, policy makers decided that prompt action was needed to prop up the battered capital markets. In its statement, the Fed explained that easing price pressures and “the recent intensification of the financial crisis” justified the coordinated rate cut.
The Fed’s latest decision on interest rates follows on the heels of an extraordinary series of interventions in the private sector that began in March when the central bank brokered the sale of Bear Stearns to JPMorgan Chase. In addition to a host of innovative lending facilities and the Fed- and Treasury-backed Wall Street bailout plan signed into law last week by President Bush, the Fed announced yesterday the creation of a Commercial Paper Funding Facility. The new CPFF “will provide a liquidity backstop to U.S. issuers of commercial paper” by buying these short-term notes—they typically mature within three months or less—directly from eligible issuers. A breakdown in the commercial paper market—a primary source of ready cash for many corporations—would have made it vastly more difficult for many businesses to fund their day-to-day operations.
There was a glimmer of good news from the housing sector today as the National Association of Realtors reported an uptick in pending home sales for August. According to the NAR, its index of sales contracts on previously owned homes jumped 7.4 percent in August and is up 8.8 percent on a year-over-year basis. All four regions of the country showed increases in pending home sales, including a dramatic 18.4 percent jump in the West, the region hardest hit by the housing slump. While the NAR’s data has its limitations—it doesn’t account for canceled contracts, for instance—it is, nevertheless, a sign that steadily falling real estate prices may finally be boosting sales.
The past several days have also seen a sharp sell-off in the energy markets, a welcome development for cash-strapped consumers, particularly those in the Northeast and Midwest where the winter heating season is just around the corner. The front-month contract for delivery of the benchmark grade of light, sweet crude slipped to just over $87 a barrel in trading on the New York Mercantile Exchange this morning as the Energy Information Administration reported greater-than-expected increases in domestic supplies of both petroleum and gasoline.
For the remainder of the fourth quarter, I am looking for the markets to remain volatile, although I am confident that the economic stabilization plan enacted by Congress was an important step in the right direction and will eventually be effective at restoring order to our capital markets. With unemployment at 6.1 percent and wages stagnant, however, I believe the upcoming holiday shopping season could be one of the bleakest for retailers in recent memory. With that in mind, I am advising my clients and subscribers to look for corporate profits to bottom out in the first quarter of 2009 and for stocks to hit a low point in the fourth quarter of 2008 in anticipation of that result. It is quite possible that we will look back on this period years from now as one of the best buying opportunities in recent memory.
