Market Hilights

April 30, 2008 1:19PM

What to Expect After the Fed Acts

By Alexis Glick

What will the numbers suggest when the bell rings at 4 p.m. today? Today is the last day of April and it’s been a pretty good month for the markets. 

Take a look at some of these figures: 

–>DJIA is on track for its biggest monthly point and percent gain since April 2007.

–>The Nasdaq is on track for its biggest monthly point gain since October 2007, and biggest monthly percent gain since May 2005.

–>The S&P 500 on track for its biggest monthly point gain since April 2003, and biggest monthly percent gain since Oct. 2003.

So will today’s move by the Fed cause the market to sell off or rally into the bell? My guess is the latter. The Fed has now cut rates by 300 basis points or three full percentage points. From 5.25% to 2.25%. Expectations are that the Fed will cut rates by 25-basis points or a 1/4 of a point today. So what happened when the Fed finished cutting rates the last time?

Take a look: 

For that we have to go back to June 25, 2003.  That was the day Alan Greenspan and company finished a round of 13 rate cuts that began on January 3, 2001 and took overnight borrowing costs from 6.5% all the way down to 1.0%.

Here’s how the market performed in the month after that final cut (6/24/03 to 7/25/03):

Major Averages:

–>DJIA+ 1.9%

–>S&P 500+ 1.6%

–>Nasdaq+ 7.8%

Industry Groups:

–>Materials+6.6%

–>Info Tech+6.1%–>

–>Finacials+4.7%

–>Cons. Discretionary+2.9%

–>Industrials+1.5%

–Cons. Staples-0.9%

–>Health Care-2.0%

–>Energy-3.5%

–>Utilities-5.3%

–>Telecom Svcs.-6.9%

Here’s a look at performance in the year following that last rate cut (6/24/03 to 6/25/04):

Major Averages:

–>DJIA+15.4%

–>S&P 500+13.9%

–>Nasdaq+26.2%

Industry Groups

–>Materials+26.6%

–>Energy+26.1%

–>Info Tech+23.5%

–>Industrials+23.4%

–>Cons. Discretionary+18.0%

–>Financials+15.2%

–>Cons. Staples+11.4%

–>Utilities+7.4%

–>Health Care+1.7%

–>Telecom Svcs.+0.2%

Let’s be clear about this. The financial markets and the economy are in a much different state today than they were in June of 2003.  Back then they were recovering from the collapse of the dot-com bubble, a mild recession, and the aftermath of Sept. 11. 

What has changed this month versus first quater? Earnings estimates are exceeding expectations. Cash is piling up on the sidelines. Investors (portfolio managers and hedge fund managers) have overindulged in the commodity run-up and have begun to unwind some of that trade, particularly in gold, as the dollar continues to rally off it’s lows and money has and will begin to be re-allocated. The market is prime for a move! Citigroup announced a common stock offering and over allocates because demand is so strong. A UK mortgage lender gets the capital infusion it needs. Hostile bids are now in vogue. Why? Value. May this be the buying opportunity of a lifetime? If you wanted to buy, wouldn’t you buy now just before the Fed considers pausing rate cuts? It’s a no brainer. The dollar is going higher! The U.S. is on sale. The worst may not be behind us but by the time you’re ready to nibble you may have to pay 15% more.

Today is one of the most important days of the year. The closing bell will tell us how psychology has changed or remained the same. Risk or Fear!
 

 

4 Responses to “What to Expect After the Fed Acts”

  1. Comment by roger

    Fear

  2. Comment by CINDY HENRY

    I would like to know if this rate cut helps a homeowner (like me) with a Jumbo Arm be able to refinance?

    I was divorced 4 years ago, a stay at home mom, refinanced the house two times in order to live based on some bad advice and lack of “smarts” on my part. And with a buch of credit card debt. BUT, I am on time every month and now work for Georgia-Pacific. I just want to consolodate and get into a 30 year fixed, but it seems impossible.

    I’ll take any and all advice. I am not looking for a handout, just a way to pay off debt & protect my home.

    Thanks, Cindy

  3. Comment by Dave Young

    The market hates uncertainty - current caution seems more due to Iraq, related spending there, uncertain 2008 and beyond gasoline and diesel fuel costs, the upcoming Primary election for he Dems,and the new media hype about world food shortages …. also looming is the question “will we have a socialist in the WhiteHouse or a Capitalist?”, and the Fed move seems buried (along with corporate earings announcements - anybody listening?)under all of that combined emotional weight. Oof.

  4. Comment by stephenlee

    Mortgage rates should be lower to reflect the cut in the prime, but banks need to rebuild their capital so mortgage rates will probably stay around 6% or so if you can find a bank willing to lend at around that rate. Good luck.

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