Market Oracle
It has been almost ten full months now since the Fed first lowered interest rates. If you remember at first there was a lot excitement over the Fed cuts. The DOW and Nasdaq rallied to new 52-week highs a few weeks after the first rate cut in September. The rally and promise of more Fed intervention for the market made many big name commentators extremely optimistic about the market.
But just a few weeks later the market turned lower and has been stuck in a bear market ever since. The banking problems multiplied and inflation skyrocketed with oil rising almost double in price now from where it was a year ago. The rate cuts tasted good at first, but are no longer palatable. When thinking about the financial markets sometimes it is best to take stock of things before trying to look ahead and decide if you need to make changes to your portfolio or figure out where to look for the best investment opportunities. A lot can be learned about looking at where the market was a year ago and comparing it to today.
A year ago from today the DOW, S&P 500, and Nasdaq were all climbing higher. They had experienced a fast and furious correction that took the S&P 500 down over seven percent in February of 2007. The financial media blamed that quick correction on “credit worries,” a fast drop in the dollar versus the yen, and a huge correction in the Chinese stock market. Rumors also circulated that some billion dollar Bear Stearns hedge funds were in trouble.
Over the next few months as the market went higher everyone thought that all of these problems were gone. Then the financial press started to focus on oil prices that were making new highs and the threat to inflation that they posed. In July the market peaked as talk intensified that the Fed might actually start to raise interest rates by the end of the year. Indeed Fed fund futures a year ago were pricing in rates hikes by the end of 2007.
Fed officials gave repeated speeches and statements that sounded hawkish on interest rates. At the same time though the drop in real estate prices started to pick up and the value in “subprime” mortgage securities went into collapse. Rumors abounded that several large hedge funds were in trouble. The Fed publicly ignored all of this. At its August FOMC meeting they released a more hawkish statement on inflation to prepare the way to raise rates. The market dropped hard that day and James Cramer blasted the Federal Reserve and Ben Bernanke on TV for knowing “nothing.” His statement was one of the most watched moments in financial TV reporting as people watched it millions of times on the Internet. More
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June 25th, 2008 at 6:50 pm
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