Markets heaved a huge sigh of relief today and rallied strongly.
So much of today's euphoria was due to the recent hyperactivity of the Fed and Secretary of the Treasury.
This past week saw the collapse and eventual takeover of Bear Stearns. The Fed was a major player in that drama as was Henry Paulson (The Wall Street Journal had a fine article on the how it all went down. It is also available on online here). I can only say that it certainly appears to have been the right thing to do. All concerned deserve kudos from the investing public for the urgency shown and hard work performed to pull things together in such a short time.
Goldman Sachs and Lehman Brothers both beat severely reduced expectations when announcing earnings today. This was another huge relief for the markets and got today's rally off to a good start.
Later during the day the Fed cut interest rates 75 basis points. Markets were looking for a whole percentage point but three quarters was deemed good enough and stocks rallied further, eventually closing with gains in the neighborhood of 4%.
I am pleased to see the Fed is active and willing to try numerous different methods to accomplish their ends of ensuring proper functioning of our financial system and supporting our economy. Nevertheless, I suspect that today's rally may hit some headwinds. We are still seeing poor numbers from the manufacturing sector. Consumer spending is flat at best. Inflation, as noted in the Fed statement today, is not to be ignored. The dollar is weak, helping exporters and hurting consumers. The financial sector is not yet out of the woods. The housing sector is still in a deep downturn. Banks still have plenty of questionable securities on their balance sheets. Company earnings are projected to be weak. Certain aspects of the credit crunch continue. The list goes on.
The Fed has managed to avert a disaster in the financial system and we are seeing a rally as a result. It still seems, however, that there are a number of issues still lurking in our economy that will take a while to resolve. The Fed has done a good job trying to stay ahead of all the problems but I don't think they have managed to eliminate all the recessionary factors currently at work in the economy. Lowering interest rates and providing multiple lending facilities for banks and investment houses are all good moves but, by themselves, can't solve everything. I think we will enjoy another brief rally and then the markets will return to the doldrums until the economy works its way into a more positive position.
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