Red October, one of the worst month in Wall Street history, ended on a sweet note on Friday as stocks rallied to cap a week of impressive gains. For the week, the Dow Jones was up 10.1%, S&P 500 was up 9.5% and the Nasdaq had gained 9.8%.
There are storm clouds gathering but at the moment, investors are caught up in the euphoria and unmoved by grim economic indicators. Next week, the US Presidential election gets underway and expectations are high for CHANGES.
Whether the new man in charge can get Wall Street and the economy back on a strong footing as well as rectify all ills associated with the current regime is another story altogether.
As evidence of a deep recession, consumers are tightening their belts while businesses face declining orders and are slowing production. The Reuters/University of Michigan Surveys of Consumers said its index of confidence plunged to 57.6 in October from 70.3 in September.
The Chicago PMI, a regional manufacturing index, plunged deeper into recessionary territory. PMI fell to 37.8 in October from 56.7 in the previous month. Economists thought it would fall to 48.
Despite stock markets in Europe registering upswings, the danger of a currency meltdown in Europe is still lurking, with bear raiders waiting to pounce on the monetary crisis. Eastern Europe, which was once the fastest growing part of Europe, bore the brunt as local currencies plunge, foreign banks curtailed loans and investors withdrew their money.
Chinese manufacturing contracts as the financial crisis erodes export demand. To decoupling theorists who believe that China alone can prop up the world economy with its domestic consumption, it is seriously a case of the tail wagging the dog. As confirmed by a Bank of China executive, China will be hit as hard by the global recession.
On the bright side, credit markets thawed with Libor, the overnight bank-to-bank lending rate, falling to 0.41% from 0.73%. The 3-month Libor fell to 3.03% from 3.19% Thursday. Lower borrowing costs bolstered confidence that the worst of the credit squeeze is over, helped by the Federal Reserve’s interest rate cuts and a trillion dollars of bailout.
Europe may be next after US, Japan, and India to be forced into lowering interest rates as its central banks try to limit economic damage from the global financial crisis. The ECB’s key rate is currently 3.75 percent and the Bank of England’s is 4.5 percent.
Many economist believe that the ECB will lower rates at its fastest pace since its creation in 1999 while the Bank of England’s cuts will be done in one fell stroke. Not since 1992 when UK exited the exchange-rate mechanism that was the precursor to the euro, have we seen such drastic cuts in borrowing costs.
With major countries taking radical measures, the stubborn credit wheels will have to budge at some point and businesses get a reprieve. We all know that in the rise and ebb of business cycles, recessions will eventually be replaced by cheery economic forecasts.
In the “near” future, house prices will stop declining and stabilize. Adventurous investors will be lured back into the market with its rich pickings of affordable houses using cheap loans. Whether the general public joins the bandwagon will depend largely on the severity of the job market though.
As we labor and save, we will also realize that money sitting in the bank is not earning a pretty return. Some of that money should be ploughed back into the stock market because stocks are so attractive and dividends makes more financial sense than than the near 0% interest in the bank.
When cash reserves build up, people will be tempted to spend again. Remember that products do not last forever and have to be replaced eventually. The spending will not be a spree at once but will be done cautiously.
Banks will release credit to consumers again, creditworthy at first and then the less creditworthy and before you know it, the economy starts to boom, inflation rears its ugly head and the same old sad story of a crisis emerges again.
The greatest investor of all time, Warren Buffet, bought stocks near the bottom of the bear market in 1974. He threw caution to the the wind with his hunger for stocks, much like an “oversexed man in a harem.” To be sure, there was a time lapse between his investments and the recovery of the real economy but his judgment paid off and his wealth exploded.
Recently, Warren Buffett commented that “equities will almost certainly outperform cash over the next decade, probably by a substantial degree.” Indeed, stocks are screaming values everywhere and the price is right. But is the timing right for an all out assault?
I can’t say for sure. I only note that panic and pessimism gathered momentum in September but true bears were routed in October… reason unknown. As the sky remains overcast, I will still exercise caution and not exhaust all my cash in one go.
Nevertheless, I believe that a ray of hope for buy-and-hold stock investors is just over the horizon. Till tommorrow.