Newsletter Fall 2007

MARKET WATCH

The third quarter provided a bit of excitement for investors, and generated a heightened concern for both the state of the economy and the direction of the markets going forward. As the quarter opened, the Fed was on hold with interest rates, the Dow Jones Industrial Average catapulted from 13,408.62 to 14,000.41 by July 19 and leverage was fashionable. Within six days, The Dow, Nasdaq and S&P 500 had given up 5% of their value, as fears concerning the economy began to rock the market. As foreclosures throughout the country continued to mount and mortgage lenders began to succumb to a lack of liquidity in the system, the Fed held the federal funds rate at 5.25% in early August, but by mid month it was quite evident the credit markets were under severe stress and the Fed lowered the discount rate, the rate banks can borrow from the Federal Reserve, to 5.75%.

The Dow crossed the 10% correction threshold in intraday trading on Thursday, August 16th, but managed to close in somewhat better shape and rallied on Friday after the Fed decision to lower the discount rate. While the S&P 500 was down as much as 12% from its July peak intraday on August 16th, it also managed to recover late in the day and rose back to 1,445 by the close on Friday, August 17. The equity markets settled somewhat through late August and over the Labor Day Holiday, but the credit markets were still in flux and the lack of liquidity was evident worldwide as central banks continued to pump billions of dollars into money market funds.

In a move that surprised nearly everyone, the Fed lowered the federal funds rate to 4.75% and the discount rate to 5.25% at the FOMC meeting in late September. These actions by the Fed were an attempt to give confidence to the credit markets and boost their willingness to provide liquidity. While the effects of the rate decrease will take time to make any real difference in the growth of the economy, the psychological results have been quite visible in the stock market, which has posted significant gains following the rate cuts. While the 50 basis point cut in rates has had a euphoric effect on the markets in the short term, it doesn’t necessarily bode well for the market in the long term. When the Fed cut rates 50 basis points in January 2001, the DJIA rose 2.8% and the NASDAQ had its best day ever, rising 14.2%, but by September 10, a day before the terrorist attacks, the indices were well below their January levels.

But for now, all we can do is look at where we have been and try to ascertain, as best we can, where things are heading. The Dow closed the quarter at 13,895.63 and is up 11.49% year to date. The S&P 500 finished at 1,526.75, which is a 7.65% gain for the year and the NASDAQ sits at 2,701.50 at quarter’s end, posting a year to date gain of 11.85%. For such a volatile year, these gains would be quite acceptable as a year end result.

On September 26th, I had the opportunity to hear an Economic Update from Jerry Webman, the Chief Economist with Oppenheimer Funds. His opinion was one of optimism for the economy and its ability to avoid a recession. He felt the moves by Bernanke were bold enough to relieve the credit crunch and shouldn’t be inflationary, due to subdued employment numbers and lower economic growth. While oil prices over $80 a barrel and rising gold prices are unsettling, the Fed’s willingness to raise rates if inflation increases is calming.

John Kaighn

Jersey Benefits Advisors

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