Wall Street hopes that the economic news is bad enough for the Fed to continue cutting rates despite the inflationary pressures of rising oil. The housing crisis seems to have no end in sight and should cause the Fed to maintain a loose monetary policy for the foreseeable future. This remains true despite the inflationary pressure of the recent rise in oil and the declining dollar.
However, there is incredible fear that the situation will spiral out of control and that the Fed will be unable to control the situation. This could then result in the dreaded "R" word, a Recession.
Thus, we see the market fall on unexpected bad news, such as the write-off by Merrill Lynch and the existing home sales data. However, we are seeing the market rally on slightly better than expected bad news, such as the new home sales report.
My belief is that the Fed will cut rates next week and that Chairman Ben Bernanke will not lose control of the situation. A Fed mistake is possible but not likely. As long as rising oil prices continue to overhang the current environment, the market will not experience a huge rally but instead slowly grind upward over the next several months. However, the increased volatility will continue to be part of the investing landscape, masking the increase. The rise will be a painful process, which will occupy the thoughts of many investors.
Remember that despite all the economic news, the S&P 500 is ahead nicely for the year, ahead of bonds. It is in line with the long-term annual rate of return of the S&P 500 of 10%. However, no one seems to be noticing this.
Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices.
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Reader Comments (Page 1 of 1)
10-25-2007 @ 3:21PM
Suzanne said...
Can you believe that the DOW isn't around 12,000 with all the following BAD economic data:
The dollar is the weakest in decades, major credit problems are bombing major banks, oil is around $90 predicting a major gasoline price increase soon, housing is literally frozen and falling, grocery and energy prices are soaring, the huge illegal alien problem remains, medical costs are jumping, and manufacturing jobs continue to go overseas...and we have a $12 BILLION A MONTH war we can't seem to win.
10-25-2007 @ 9:06PM
Lydia E. Dugan said...
How can the Fed Chairman even think of a cut in interest rates with the dollar so low it is near death? He clearly cut too much at the last meeting. I do not think he wants to preside over the dollar's demise. The blow to America's prestige would be real and lasting, something not to be undone.
The stock market is not the Fed's legitimate concern. Its sole job is monetary policy.
10-26-2007 @ 12:59AM
Jive Dadson said...
Yeah, why should the Fed consider the poor and middle class, when there are bankers and brokers at risk? So what if pensions that people have worked for all their lives become worthless? The cost of bread and milk is not an issue. Ten dollar a gallon gasoline? Won't bother me. Another month of economic frenzy, I say. Remember, during the Weimar melt-down, the German stock market rose to astronomical heights. That's what we need. DOW 14,000,000,000!
10-26-2007 @ 1:16AM
Jive Dadson said...
Yeah, why should the Fed consider the poor and middle class, when there are bankers and brokers at risk? So what if pensions that people have worked for all their lives become worthless? The cost of bread and milk is not an issue. Ten dollar a gallon gasoline? Won't bother me. Another month of economic frenzy, I say. Remember, during the Weimar melt-down, the German stock market rose to astronomical heights. That's what we need. DOW 14,000,000,000!