A week ago Friday, as we were shutting the doors to our offices on Hoosick Street, my brother and I both noted that we were looking forward to the long weekend as the markets would be closed the upcoming Monday in honor of Dr. Martin Luther King. One of us stated that, after three consecutive down weeks in which the Dow Jones Industrial Average had shed more than ten percent, “it would be nice to relax for that extra day and not have to worry about where stocks were headed.” We knew that over the weekend we would hear all of the news reports on how stocks were off to their worst start in history and how the sky was falling. Little did we know was how that extra day off would make this past week feel like it lasted a month. (One quick note prior to our tale of the trials and tribulations of stock investors this past week: due to the time difference, markets, the Far East (India, Japan, Hong Kong, China et. al.) open first, then Europe and then the United States.)
After watching the beloved New York Giants squeak past the Green Bay Packers last Sunday night along with the rest of my family, I turned on the television to the Bloomberg Financial network which covers the global markets and noticed that the markets of the Far East were down nearly five percent in early trading and that the projection for the European markets was not much better. It was with this knowledge that, while continuing to watch the losses mount, I pulled out the computer and logged on to the internet to find out what was roiling the emerging markets and found that there was a rumor circulating that a major European bank was about to declare bankruptcy due to more than $45 billion in losses stemming from the global mortgage crisis. Needless to say, neither my brother nor I had a good night’s sleep.
The next day, despite the fact the markets in the United States were closed, we came to work and pulled out our plan of action which includes, among other things, taking a look at all of our investments and all of our accounts to makecertain that we are holding securities which we believe will help our clients achieve their objectives over the long-run. That task being completed, we then evaluated what the impact of an acceleration of the subprime mortgage mess would mean to our stock and bond markets. The result was a list of the actions we would take should certain events transpire. In between, we met with a couple of clients. Late last Monday morning, the results were in and it wasn’t pretty. The markets of Southeast Asia were down anywhere from five to ten percent while the European markets were down about five percent. Please remember that our stock market was closed. Sometimes the anticipation is worse than reality.
Monday night about ten o’clock, I once again checked the Bloomberg Financial Network and noticed that it was almost a repeat of the previous night with the markets of the Far East down five to ten percent and Europe pointing to a similar move downward. The rumor mill continued to whisper of a major European bank experiencing severe financial strain and perhaps bankruptcy. Once again, the result was a sleepless night.
Tuesday morning confirmed what we had feared most, which was for a projected 500 point drop in our stock market upon its opening at 9:30 a.m. However, at approximately 8:30 a.m. the Federal Reserve announced that it was cutting interest rates from 4.25% to 3.50%, the largest between regularly scheduled meeting rate cut in history citing that it was taking this action “in view of a weakening of the economic outlook and increasing downside risks to growth.” The Dow Jones Industrial Average bent, but did not break like other global markets, ending down “only” 128 points as represented by the Dow.
Once again, Wednesday morning, stock futures pointed to a sharply downward opening and unlike Tuesday, this time the Dow did not disappoint dropping over 300 points during the morning and early afternoon as investors panicked. However, as usually happens when pessimism and panic reign, the market turns and turns with a vengeance. This time was no different as the Dow Jones Industrial Average made up those 300 points that it was down over the remainder of the afternoon and tacked on another 300 just for good measure.
Turn the page to this past Thursday morning. We woke up to the fact that the major European bank mentioned earlier in this article that was to be taken down by more than $45 billion in losses stemming from the mortgage misery was inaccurate, yet still astounding. The fact of the matter was that French banking giant, Societe Generale, had discovered losses of more than $7.5 billion as a result of bogus trades put forth by a rogue trader. Although devastating for investors in Societe Generale, the global stock market breathed another sigh of relief that the company was not writing off billions in response to losses in their mortgage investments and that this was a company specific problem.
After this tumultuous time, the question now becomes “was this a bear market rally, one which will fade fast with the downside reasserting itself” or “have stocks seen the worst of this nearly top to bottom twenty percent correction and will now begin moving back toward Dow 14,000?” Although too early to tell, we believe that we have seen the worst of this correction, but that stocks may certainly retest the low on the Dow of 11,645 set this past Wednesday. However, should a successful retest occur, the all clear bell will ring! Another scenario, which we deem possible, is that the monetary stimulus from the Federal Reserve along with the fiscal stimulus promised by the Bush Administration and Congress will now be interpreted positively by stock investors resulting in a bull market for stocks, one in which will not look back. Either way, we believe that after a long month this past week, more restful nights are ahead.