End of the Year Commentary
by Guy Baker
The Holidays are a time for acknowledging our blessings and giving to those we love.
But the markets weren't in much of a giving mood through Thanksgiving, taking back even more of this year's gains.
Then the market bounced. The Dow [down -1.49%; +4.15% YTD thru Thanksgiving and then up +2.38, +6.53% YTD], the S&P 500 [-1.24%; +1.58% then bounced +1.27% and +3.74% YTD], and the NASDAQ Composite [-1.54%; +7.51% then bounced to +2.47% and +9.98%YTD] all were up for the week following Thanksgiving and still clinging to positive returns for the year overall.
Friday, November 24, 2007 a New York Times article explained in this brief quote:
"The Fed's economic forecast, issued in a new, more detailed format, didn't help matters. The Fed projected reduced economic growth, higher unemployment and a continued threat from inflation. That report came on top of high oil prices and a weak dollar."
Markets price current circumstances, so if it was looking for reasons to sell, it certainly didn't need any news more pointed than that. I suppose we should be thankful for the positive total returns so far in 2007, if they hold. And even though they are a less than they were a month or two ago, considering the sub prime problem, the war, the high oil prices and the housing slump, it could and historically has been a lot worse. Looking at some of the long faces on Wall Street, you'd think we were deep in negative territory.
If you hadn’t noticed, interest rates continued their slide in both the Treasury and mortgage markets. Rates on 90-day T-bills were lower and will carry other short-term investments (such as CDs) along with them. That's bad news for investors in money-market funds, which will see their returns decline very quickly due to their short maturity structure.
Mortgage rates also fell for the week, and 15-year and one-year rates are now lower than they were at the beginning of 2007. Rates on 30-year mortgages are just a few basis points above their January levels, and we can expect them to fall further in the next few months. This could stimulate refinances and perhaps engender activity in the housing market.
Those fortunate few who can refinance (sub prime really increased the loan requirements) will be more than offset, however, by those who won't be able to afford their reset mortgages. They'll face foreclosure, and in some cases, bankruptcy. So expect to see some type of rescue program either from the government or the private sector. I would really be surprised if the government allowed wholesale foreclosures.
The U. S. dollar continued its slide against both the Euro (€) and the Japanese Yen (¥). The weak dollar is a boon to U. S. export manufacturers and companies with strong overseas earnings, but a real problem for consumers and tourists planning foreign travel.
Gasoline prices actually have eased a bit on the national level, but I expect this to be temporary with further increases coming as crude oil hovers at the $100 per barrel mark.
So in the December final analysis, staying put still seems like the best strategy. Holding fast is always a great strategy.
When the market turns, and it always does, being fully invested will pay significant dividends.