Weekday Commentary from Scott Middleton
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Don't Count on the Fed
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Market WrapUp for the Week
Monday l Tuesday l Wednesday l Thursday l Friday
Monday, August 5, 2002 Market WrapUp
Double Dipping
The past few days of economic data is driving concerns of a double dip recession. So much to the tune that Goldman, Sachs & Co. economists are convinced that the Fed may consider another rate cut during their meeting next week in order to avoid recession. Remember, it was only five weeks ago the bank said growth was strong enough to warrant an increase, so to make a sudden 180-degree turnabout is probably unlikely. However, should consumer confidence and the economy continue to deteriorate in the coming weeks, the Fed will surely act swiftly.
Consider this--for some time now it has been the belief of many that when the Fed cuts rates the markets will rebound. Will that happen this time around? With rates currently at 1.75%, what effect is lowering it going to have? The markets could very well react positively to a rate cut. Surely the media is going to pump it up and convince everyone that what the Fed is doing is right for your portfolios. What they won’t tell you is that by cutting rates further, they are running the risk of further alienating foreign investors in the U.S. markets. Without foreign investment dollars the market is unable to support itself. Henceforth, the rally will, no doubt, be brief and many people will just use it as an opportunity to eliminate positions and the market will continue in the general trend downward.
The Economy
The ISM’s index of retail, financial services, construction and other non-manufacturing companies dropped to 53.1 during July from 57.2 in June. A number above 50 still means expansion, but this was the second straight month the pace of growth slowed.
Financial Markets
The Dow slid 269.50, or 3.2% to 8043.63. The Standard & Poor's 500 Index fell 29.64, or 3.4% to 834.60. All 10 of the benchmark's industry groups dropped. The Nasdaq slid 41.95, or 3.4% to 1205.97, led by shares of Cisco Systems Inc. Trading fell to 1.4 billion shares on the New York Stock Exchange, the slowest day in a month. More than three shares fell for every one that rose on the exchange.
Financials and pharmaceutical companies led today’s decline as Lehman analyst, Brock Vendervliet, lowered his rating on Citibank and JP Morgan Chase & Co. from strong buy to "equal weight."
Overseas Market
European stocks slumped as more evidence economic growth is stalling prompted investors to sell shares of companies such as BHP Billiton and Imperial Chemical Industries. The Dow Jones Stoxx 50 Index closed 3% lower at 2526.33 as 49 of its members declined. All eight major European markets were down during today’s trading.
Taiwan stocks tumbled and the TWSE Index had its biggest drop in 21 months after President Chen Shui-bian described the island as a separate nation and supported a referendum on independence. Japan's Nikkei 225 stock average lost 0.05%.
Treasury Market
Treasury bonds traded significantly higher in response to continued weakness in the equity realm. Yields on a benchmark 10-year remain at their lowest levels since early November. The 10-year Treasury note was up 22/32 to yield 4.205% while the 30-year government bond gained 30/32 to yield 5.16%.
© Copyright Scott Middleton, August 5, 2002