Stock Markets Discounting Recessionary Fears

By: Paul_J_Nolte

Is October over yet?? The markets are down over 25% for the month, however on the four up days that actually did occur during the month, the indexes managed to gain over 20% - just image the carnage without the those fabulous four days! Liquidations by both mutual and hedge funds have made the last hour of trading something of an art form as investors guess whether the markets will tack on or drop a few hundred points. The recessionary fears of just a month ago have now morphed into full-blown depression fears and not just here, but around the world. The historic market declines to this point likely have already captured much of the economic pain we will experience in the weeks/months ahead.

Next week the Fed is likely to lower rates again – by a half of one percent and there also may be additional news on more funding/guarantees extended to various financial entities. The employment report will likely leave a bad taste in investor's mouths before the weekend, as non-farm payrolls could drop near 200,000. Earnings reports will also be a regular feature next week and are likely to continue the past trend of lousy guidance. The credit markets are beginning to unfreeze, but not at a pace to entirely calm the jittery market. Next week could be the markets' denouement, allowing us to finally begin to put money to work more confidently.

Negative and still going down is the best we can say about the markets. They should be rallying, with the unrelenting selling a relief rally of more than one day would point to at least a short term bottom being put in place. However, trying to pick an actual bottom is pure folly, but what we have been saying for the past two weeks is that we are in range of a bottom, meaning that the long-term valuations point to a cheap market that should return well above average rates of return in the future.

Whether the bottom is this week, next week, next month or sometime next year, we are slowly adding to existing positions to average them down, taking advantage of the very high volatility in the markets to get accounts back to “normal” market weights after being under weighted for the past year. While we'd like to be confident that the bottom is in and happy days are soon here, we won't be able to say that until well after a recovery is in place – and so far we are a long way away.

The Fed meeting this week is likely to be important for a multitude of reasons, not the least of which is to get, in action, the Fed's feelings about the economy. Expectations are for a half percentage point cut to an even 1%. We don't expect this to spur economic activity just yet, but it is a far cry from the actions during the early 1930s in response to the market crash of 1929, when the banking authorities actually increased rates and cut monetary growth, making a bad situation into something much worse.

Today, the governments around the world are tossing money around the financial system trying to develop some trust between loan participants. We are beginning to see some benefits, but they are very small and not yet back to the “normal” levels we saw in July/August. As we have mentioned often in the past, unlike many other recessions before this, time will heal these wounds – not just money.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2008 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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