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Okay, I admit it, I was a bear. It's not like I was the only bear in the market. There was no shortage of us. Any time you've read market commentary in the past couple of months, I'm sure you've come across analysts, economists, pundits who gave near doomsday scenario. I mean, can you spell Greenspan.Guess what? The bears were right. There was cause to be concerned. There was cause to think the markets are headed down. There was cause to think all that because the signs to indicate so can be seen all over. Signs from the recession in the housing market, the credit crunch, to the recent employment report, the list only goes on. All of those indicate the U.S. economy may be in for rough times ahead. Today, the Federal Reserve proved the bears right with a half-point rate cut. It's not a small move and is indicative of the fact that the Fed has been seeing the same signs and acted preemptively. It is actually rather obvious from the policy statement: "Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."
The bears were right ... to a point. This is where the bears got it wrong. The bears didn't see such a move by the Fed. Like many others, I expected a quarter point cut, no more. I thought any bigger move than that would be clearly seen as Bernanke trying to appease the financial markets. Bernanke didn't care -- bears first mistake. But the bears worse mistake? They (we) didn't realize the effect such a move would have on the markets. No panic ensued questioning the reasoning for such a move, just exhilaration that it happened. The result -- the best rally stocks have seen in four years -- cannot be contested. The Dow, the Nasdaq, the S&P 500 all rallied 2.5%, 2.7% and 2.9% respectively. The blue-chips, the tech stocks, even homebuilders, all joined in. Not only that, but the "fear gauge," aka the Volatility Index, or VIX, has fallen 34% since reaching a four-year high on Aug. 16. Sure, the dollar fell to yet another record low against the euro, but I guess that can only help exporters.
The bulls didn't stop there as commodities got a lift from the lower U.S. dollar: Crude oil climbed above $82 a barrel for the first time and may continue to climb due to higher economic growth expected from the cut. Gold futures also rose to a 27-year high no less. Expectations of a lower dollar may continue to put upward pressure on oil and gold.
And the best part as far the bulls go? There was indication in the statement more rate cuts might follow: "The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."
The bears were definitely right, but boy, were they ever wrong.
[photo ShellieRaney]
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Reader Comments (Page 1 of 1)
9-19-2007 @ 7:38AM
MTfunds said...
Actually most of this was anticipated. A rate cut to show effort to help the credit crunch (confidence builder) and a rally to follow. But don't count your chickens before they hatch (unless you're a day trader about to cash in). This move is to help growth and expansion but it does very little to help the consumer. Yes, the consumer is still not in a position to buy from this expansion so what will sustain this growth? In the long run who will support this growth? People with large mortgages and credit debts or those who are foreclosing or claiming bankruptcy? These days are wonderful, rallys are exciting but still the piper has not been paid. Data will still come in and if it's not better, how will they sustain false hopes. Time will tell if this was just one more comforting bandaid on an amputated economy.