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'Slow Growth' Or Recession?

by: Gary Gordon January 21, 2008 | about stocks: BWX / IHI / KXI / PCY / SPY    
Gary Gordon

Gary Gordon

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Chairman Bernanke may be right that the U.S. economy is on a slow growth path. But Wall Street's mob has spoken clear and loud.... "Recession!"

You have to wonder how much longer the Fed intends to hold out. The S&P 500 SPDR Trust (SPY) has dropped 9.5% in 12 January trading days. That is undeniably ruthless.

And in many ways, stock markets worldwide are far worse off than they even appear. Since the October 9th market top, the S&P 500 SPDR Trust (SPY) is roughly down 15%.

And the Nasdaq 100 (QQQQ)? The Russell 2000 (IWM)? Financials (XLF)? Tech (XLK)? EuroPacific (EFA)? All down within striking distance of 20% + losses from respective peaks. (Keep in mind, the chart below doesn't include the 3% downdraft that occurred today, the 17th!)

So we are talking about a bear market... are we not? We can be technical in our description such that the Dow 30 and the S&P 500 are still in the midst of a mid-range correction. But the truth of the matter is... the Federal Reserve needs to restore confidence.

Now I know there are those that believe the Fed won't provide enough rate-cutting stimulus. But I disagree. Wall Street's stock and bond traders have forced the Fed's hand. Believe it or not, Bernanke and company will "pony up."

The upcoming rate cuts won't help real estate. Lower interest rates aren't going to save the economy by themselves, nor will they be the sole reason for a stock market's revival.

What will the soon-to-be-aggressive rates cuts provide? Confidence. Investing is all about fear (no confidence) and greed (confidence). And once the Fed contributes mightily to the restoration of confidence, the broken markets will begin to heal.

Until that time, however, shelter can be found in very few places. I still favor Global Consumer Staples (KXI) and Medical Devices (IHI) for relative stock market safety.

That said, Lehman International Treasuries (BWX) and Emerging Market Debt (PCY) are part of a precious few number of investments that have positive results for the last 3 months.

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This article has 7 comments:

  •  
    Jan 21 04:34 PM
    Why does everyone think the Fed is responsible to restore "GREED" (confidence) to the market. It's become very evident that people have been SPOILED by the years of the Greenspan-nipple... Like people who never discipline their children and then turn around and blame society when they get into trouble.... WoW!
    Reply
  •  
    Jan 21 04:52 PM
    The rate cut and this obsession with the Fed is such a red herring... has anyone noticed that earnings forecasts are coming DOWN? jesus f'ing christ, if i see another post about how a rate cut is going to restore confidence i'm going to scream.
    Reply
  •  
    Jan 21 05:23 PM
    Gary is correct - Wall Street has forced the Fed's hand. That is ultimately why the rate cut will not slow down the recession - The Fed is 2 steps behind investor sentiment, rather than leading it towards optimism.
    The market has already priced in 50bp. And the indexes are tumbling - fast. This recession is due to standstill in credit markets, especially on the American front. Housing is deflating, CMBS is beginning to unravel, and retailers can't sell product. Where is the money supposed to go? Who do you loan to?
    Reply
  •  
    Jan 21 08:32 PM
    Fed rate cuts take at least a year to have an effect ...and housing is still going to be on the injured list.

    Why do you think Bernanke went to Congress with hat in hand asking for a stimulus package?? He knows there is nothing left he can do in the short term.

    And CONFIDENCE in the market?? That walked away 3 weeks ago with the lousy Xmas sales and the 5% UE rate.

    Whether you sell now or sell into a rally ...I honestly don't know what's best at this point. This market is seriously wounded and is not getting back up for a long time. Plan accordingly.
    Reply
  •  
    Jan 22 02:07 AM
    Check out the U.S. futures - pointing to a 500+ drop on Tuesday... One would think we are in a depression. I just think that investors are realizing that the emerging markets boom is about to go bust at the very same time the U.S. market is going bust! If gold goes bust, I don't know where to park my money!
    Reply
  •  
    Jan 22 02:37 AM
    Why look at IHI instead of QID et al?
    Reply
  •  
    Jan 22 12:00 PM
    Good call on the Fed cut. Now, when is the disconnected elite Wall St. and Fed going to realize that AMERICAN'S INCOMES(READ:WAGES) ARE STAGNANT!?
    This aristocracy while sweep up the crumbs after 75% of the electorate is financially (either by debt, health, or outsourcing) IN THE TOILET. Reflation of Wall St. shows Bernanke is rewarding non-wage elitists.
    Reply
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