Market Wrap Up

January 22, 2008

DOW 11,971.19 -128.11 S&P500 1310.50 -14.69 NASDQ 2292.27 -47.75
10yr Bond 3.48 -0.15

The stock market was closed on Monday for Martin Luther King Jr. Day. But while our markets were closed, global markets worldwide sold off. Hong Kong, Shanghai and India plunged more than 10% in the last two sessions.

Stocks started to fall right from the open even as the Federal Reserve cut interest rates 75 basis points. In their comment they stated “While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate." I had been calling for more aggressive rate cuts for some time and this is good news. The cut did help pull the market up from its lows. If the Fed had not cut rates we could have seen a much larger decline.

This was the first emergency rate cut since 2001 and a surprise, since the Fed is scheduled to meet at the end on the month. What’s interesting is that despite the rate cut, the market is pricing in another rate cut at the end of the month of another 50 to 75 basis points. The Fed funds rate now stands at 3.5%.

So what is causing the declines in the market? Fears of a recession. The problem is we have been aware that the economy is slowing for some time, which has led to the market coming off its record highs. Additionally, we will not know if we are in a recession for some time. To determining if we are in a recession we need to look backwards. A recession is defined as two consecutive quarters in which real GDP adjusted for inflation declines and we have not seem this yet. It also takes about twelve months for a rate cut to be felt in the economy.

A little history about the market and recessions reveals that the stock market has historically fallen going into a recession, but stabilizes during the recession. The market than rallies sharply as the economy pick up steam and comes out of the recession.

What should investors do? Investors need to only look back at the 1987 market crash and the market downturn after 911 to realize that if you held your investments you were better off than selling them. In fact, despite the October cash in 1987 the market still posted a positive gain for the year. My point is don’t try to time the market, you will lose. As a long term investors stick to your investment plan and be ready to scoop up the worlds best companies at discounted prices once the market stabilizes.