Last Week’s Highlights:
Economics This Week:
The Fed Cuts Ahead of the FOMC
In a bold move to help the markets, the Federal Reserve cut the fed funds rate and the
Discount rate by 75 basis points ahead of the market open. This will certainly help but not
cure the downside momentum in the near term. They are still due to meet next week and
could cut again if it were necessary.
The Market Reprices a Recession
Ok, are we still in “shock and awe” mode after last week, or was last week just a bad dream?
If you’re like me, I’m kind of hoping I’ll wake up after a nice nap on the beach in Puerto
Rico (Fortigent’s winter conference site) and find all is well. Seems that strategy hasn’t been
working for days now, and the worst is probably not yet behind us – especially with the preopen
numbers here on Tuesday. The cold, harsh reality is that, in a flash, the market has
suddenly decided that the economy is heading into recession and they better well do
something about it. Or was it simply that the financial markets have long been ignoring the
economic conditions caused by higher oil prices, non-core inflation, and an outright
depression in the housing market – Hmmmmmm – I think that’s it in a nutshell.
So why the sudden and excruciating repricing of the entire market in just a few days span?
That’s a hard one indeed. My take is that a combination of the slower Q4 earnings now
starting to trickle in, the slight uptick in unemployment, and Bernanke and the
Administration taking center stage on how to remedy the soon-to-be-recession, finally got
the Wall Street herd thinking the last penny had been squeezed out of the market – time to
hit the exits, stage left! We’ve all been through this before, many times. The long road higher
ending with a bang. So the good news is this – we’ve all been here before!
Do we like what we owned last week or last month for our clients? We sure do. Are our
portfolios reasonably well-diversified between, stocks, bonds, domestic, international, and
alternatives? They sure are. So, what’s taking place is simply a test that’s given to all us
professionals about once every three years or so. The market is seeing if we will truly stay
disciplined, or whether we can be tempted to dump it all, run for the hills, fill up the gold
and T-Bill accounts, and hide out under our mattresses. Believe it or not, the market still
cycles higher and lower no matter whether we’re in a manufacturing or service economy, a
"new economy" or an "old economy." Yes, the coming recession is being led by a horrible
housing market decline but, guess what, every recession since the late 50s was also led by
almost the same circumstance.
Here’s my simple observation – you’ve been planning your client portfolios for years – you
know their objectives and goals – you knew a storm could hit the portfolio at any time – and
that time is now. But storms, like this market correction, ultimately find their way to clear
skies and better levels once prices fairly reflect the economic facts. So, you hang tough, make
the tweaks around the edges, hold off a bit on new funding, dollar-cost average into a market
ripe with opportunity and value and, most importantly, communicate with your clients.
With the talk of fiscal stimulus coupled with a very accommodative Fed, we most likely will
see a soft landing, with better results in the second half of the year. This is not just this
observer’s opinion, but one of nearly every seasoned economic forecasting team including
the Federal Reserve – and they really hate being wrong in an a election year.
Lighter Side: A few oldies but goodies
“Merrill Lynch has just adjusted its investment portfolio: 50% cash and 50% canned goods.”
Internet
“The market may be bad, but I slept like a baby last night. I woke up every hour and cried.”
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