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THE MARKETS
Last week’s business
news underscored the severity of the current economic slowdown.
We
all know October was a bad month in the financial markets.
What we didn’t know until last week was how bad the
economy was faring during the market meltdown. Well, on Friday,
the Labor Department delivered the dreaded news that our
economy shed 240,000 non-farm jobs in October. And, if that
wasn’t bad enough, they significantly revised the September
payroll numbers to show a decline of 284,000 jobs. The data
led to a 6.5% unemployment rate in October, which is the
highest rate in 14 years, according to MarketWatch.
The way
the stock market responded to this news is rather instructive.
In
the two days prior to the release of the employment numbers,
the S&P 500 index declined a whopping 10%, according
to Bespoke Investment Group. That was the largest two-day
decline since the market crash of October 1987. What triggered
the drop? While we’ll never know for certain, it appears
that some investors were selling ahead of the anticipated
bad employment numbers. According to a Reuters article, “Goldman
Sachs analysts had expected up to 300,000 jobs may have been
cut from non-farm payrolls in October. So, when the Labor
Department reported 240,000 jobs lost last month, that did
not send the stock market into a tailspin even though the
figure exceeded the median forecast of 200,000.”
This is an example of how
the stock market tends to anticipate what’s going to happen and, then, reacts accordingly.
On the day the employment numbers were released, the S&P
500 index actually rose nearly 3%. In effect, it was a “sell
on the rumor, buy on the news” strategy.
Even armed
with the knowledge that markets tend to anticipate what’s going to happen, it’s still difficult
to try and profit from it. There are a couple reasons why.
First, one never knows exactly what news is already baked
into stock prices; hence, it’s hard to predict how
the market will react when the news is released. Second,
at times the market may predict things that don’t actually
happen. For example, there’s an old Wall Street saw
that says, “The stock market has predicted nine of
the last five recessions.” Clearly, Wall Street’s
crystal ball is not always “crystal clear.”
Wishful
thinking aside, it appears that this time the market is
accurately predicting a recession.
| Returns through 11/7/08 |
1-Week |
Y-T-D |
1-Year |
3-Year |
5-Year |
10-Year |
| Dow Jones Industrials |
-4.1 |
-32.6 |
-31.4 |
-5.5 |
-1.8 |
0.1 |
| Nasdaq Composite |
-4.3 |
-37.9 |
-37.3 |
-8.9 |
-3.5 |
-1.2 |
| Standard & Poor's 500 |
-3.9 |
-36.6 |
-36.0 |
-8.7 |
-2.4 |
-1.9 |
Source: Yahoo! Finance, Barrons.
Past performance is no guarantee of future results. Indices
are unmanaged and cannot be invested into directly. Three-,
5-, and 10-year returns are annualized. Assumes dividends
are not reinvested.
During this week in 1867, the first stock
ticker was unveiled in New York City. It replaced mail and
messengers and allowed investors around the country to receive
up-to-the-minute stock prices. But, most importantly, the
tape from the machines made for great parades!
ISN’T IT IRONIC that one of the major
causes of our current financial predicament – borrowed
money – is exactly what the federal government is using
to try and solve the crisis? One has to look no further than
the Federal Reserve’s balance sheet. The Fed has pulled
out all the stops and flooded our financial system with all
kinds of “new facilities” that have dramatically
expanded its assets and liabilities.
As of November 5, the
Fed’s balance sheet had ballooned
to over $2 trillion in assets. That’s up more than
100% in less than 60 days, according to data from the Fed.
And, it may not stop there. Richard Fisher, president and
CEO of the Federal Reserve Bank of Dallas, said in a November
4 speech that, “I would not be surprised to see them
[assets] aggregate to $3 trillion – roughly 20% of
GDP – by the time we ring in the New Year.” The
thought that the Fed’s balance sheet could triple to
$3 trillion in the span of four months shows how serious
the Fed is about trying to minimize the impact of this financial
and economic crunch.
So, where does the Fed get the money to
expand its balance sheet? By borrowing, of course! Last week,
the Bush administration
announced plans to borrow a record $550 billion between now
and the end of the year, according to Associated Press. That’s
necessary to help fund our federal budget deficit, which
some experts predict will hit $1 trillion this fiscal year
(2009). For the full year, government borrowing could total
$2 trillion, according to Mark Zandi, chief economist at
Moody's Economy.com. Boy, a trillion here, a trillion there,
and before you know it, we’re talking serious money.
But,
just like us normal people, the government can’t
continue to borrow money indefinitely without major repercussions.
The government’s ability to borrow is generally limited
by somebody else’s willingness to lend. And, those
lenders have increasingly been countries such as Japan,
China, and the United Kingdom.
At the end of August, the
national debt of the U.S. was
approximately $9.6 trillion, according to the Treasury Department.
Of that, just three countries, Japan, China, and the United
Kingdom, held about $1.4 trillion of the total. If these
countries, or any of our other lenders, decide that they
don’t want to own any more of our paper, then we may
run into trouble financing our deficits. That, coupled with
the specter of rising inflation if we juice the economy too
much, may act as a governor on the government’s ability
to add liquidity to the economy.
With that said, it appears
that the government still has takers for our treasury securities
and that inflation is
not currently a big concern. Consequently, the government
may continue to borrow money to help jumpstart the economy.
Hopefully, they’ll borrow just enough to get us out
of this economic funk, but not so much that we end up drowning
in debt from which we can’t escape.
What Do You Know About Turkeys?
1. What
is the Turkey Trot?
a. A herd of turkeys being walked to market in England
b. A 1900’s dance in which couples circled each other
while bobbing their heads and strutting like turkeys
c. A cute name for the way turkeys move
d. All of the above
2. How fast can wild turkeys fly?
a. They cannot fly
b. 30 mph
c. 40 mph
d. 55 mph
3. What is the pouch-like area at the
front of a turkey’s
throat called?
a. A dewbill
b. A snood
c. A wattle
d. A beak
4. Which of the following is the name
for a young male turkey?
a. A hen
b. A tom
c. A jake
d. An eyas
Click here for the answers.
Thanks for your trust & confidence,
P.S. DON'T KEEP US A SECRET! At Ford Wealth Management we know that referrals from your friends, family and colleagues are the sincerest form of flattery. We appreciate your business and hope that you will pass along our name and number to anyone who would benefit from our services.
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