The Fed cut the discount rate, and stocks jumped 300 points in 10 minutes. The 3-mo./10-yr. spread is +81 B.P. and the AA-rated commercial paper curve is finally positive. Agressive investors who can stand volatility may want to increase their risk exposure.
Less aggressive investors may want to wait until quality spreads stop widening, the asset-backed commercial paper curve normalizes, or the Fed lowers its targe funds rate.
The good news for all investors is that the ten-year note at 4.6% is near its 2002 low of 4%. Since this note is the benchmark for many adjustable-rate mortgages that will face refinancing soon, fewer Americans may go into foreclosure.
2 comments:
Thanks Deborah for your insightful observations. I am concerned about the decline in the economically sensitive sectors (Emg Mkt EEM, Materials XLB, Energy XLE, etc.) I understand these sectors are pricing in an increasingly likely economic slowdown or recession.
I also notice that over the past six weeks the % Bullish (number of stocks in XLB) for Materials sector has collapsed, and is now at levels which were previously associated with washout lows. (see chart at stockcharts.com for $BPMATE) My take is that the Materials sector is sending a signal that a global slowdown is upon us.
But shouldn't lower interest rates, and a steeper yield curve be stimulative and supportive of continued economic growth going forward? And if so, are these economically sensitive sectors a buy right here at these depressed levels? This looks similar to what we experienced in May-June of 2006.
I have owned all these sectors at times in the past, but I am increasingly concerned here that something is different this time around, and a huge global bear market is next. From a contrary perspective it is likely a good thing that I am fearful.
Always very appreciative of your thoughts. Best Regards, Jim P.
(Waterford, CT)
Dear Jim,
I am concerned about those markets as well. The Fed can prop up just so many sectors and will certainly try to avoid a housing or global depression. I am not as bearish as you but do think that commodity-related investments (EEM, XLB & XLE) will not grow as rapidly as in the past.
It sounds as though we are neighbors; will I see you at any Stamford CFA Society meetings?
All the best,
Deb
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