Personal Finance Advice

The stock market was buoyed by comments from both Federal Reserve Chairman Ben S. Bernanke and Vice Chairman Donald L. Kohn and led investors to believe that another rate cut is likely during the Fed’s next meeting December 11.  This was a welcome sign that gave many investors hope after the stock market had it’s largest one day loss in five years earlier this week.

Bernanke in a speech before the Charlotte Chamber of Commerce yesterday and Kohn speaking on a series for international economics in New York the day before, gave the impression that the central bank would take a more active role in the economy in the wake of the crisis that financial institutions are currently undergoing.

While most investors feel a quarter percent cut is almost certain, some believe that the Fed will cut rates by as much as half a percent.  Analysts have pointed to the fact that futures contracts have already priced in these rate cuts in showing what investors’ sentiments are.

With the effects this would have on inflation as well as an already weak dollar this would lead me to believe the Fed is very concerned about the long term economic outlook.  As I stated in my previous article, the banking system has many inherent flaws that even rate cuts won’t fix, at least in the short run.  What rate cuts can do however is mitigate the fallout as the housing slump and sub prime lending disaster reaches it’s inevitable climax sometime next year.

I don’t believe we have seen the worse that is yet to come, so you could make the case the Fed is being smart in being proactive since it takes time for these cuts to have an effect on the economy.

The banking system is going through some rough times right now.  Large losses from the sub prime lending disaster has seen some of the world’s largest financial institutions brought to their knees.

Pillars of the financial community, Merrill Lynch and Citigroup have seen their stock price plummet, losing basically half their market value over the course of a month as frightened investors run for the hills.  And they’re not the only ones, the entire financial sector is feeling the pain, the possible lone exception is the insurance segment which by it’s very nature is risk averse.

The troubles in the banking system has also had a large effect on the rest of the stock market as well.  Even with the housing slump, it was shaping up to be a pretty good year for the market up until the point banks started reporting their huge losses.  The month of November has seen all of those positive gains go up in smoke.

And it’s not going to get better anytime soon.  No matter how much the Federal Reserve lowers interest rates, things aren’t going back to what they used to be.  Let’s say for instance that the Fed lowers rates to 1% again like it was a few years ago, which by the way has almost no chance in hell of happening, banks aren’t going to lend like they did when this whole mess started.  At least one would hope not.

Money is going to be tight for awhile, plain and simple.  The days of free and easy lending are over.  It’ll be like it was after the Junk Bonds and Savings & Loans scandals of the 1980’s.  Although I’m not so sure the government will be able to bail out the banking system this time.

The financial sector is the grease that keeps the economy moving and with all the trouble it’s having right now I honestly don’t see how we can avoid the recession that many Americans feel is just around the corner.  Hopefully banks will learn something from all this and we end up with a stronger and more stable banking system, that is until the next scandal.

What seemed like a successful year for the stock market back in October is now a distant memory.  The month of November has seen the stock market give back all of it’s gains for the year.  It was the largest one month loss for Wall Street in over five years.

Financial stocks especially took a beating this month.  Large write downs for a number of large firms have led many analysts to downgrade pretty much the entire financial sector.  A deepening housing slump also has no end in sight.

The impact can be felt elsewhere as global investors, worried over the U.S. economy, drove down prices in stock markets around the world in massive sell offs.  Oil prices also came perilously close to the $100 mark again as cold weather hits the northeast last week.

Can the market rebound in December? 

It is difficult to say but like it always is in Wall Street, one man’s loss can be another’s gain.  With such large losses for the month, savvy investors will be on the lookout for bargains.  It will depend on what will investors’ outlook be for the months ahead.

These next couple of months could be pivotal for the stock market and the rest of the economy in general.  Careful scrutiny will be given to economic data released next month to see if there are signs that the economy is slowing or that inflation is rising.  Retail figures for the holiday shopping season will also be an important indicator of consumer confidence.

Investors will also be carefully watching for a move on the Federal Reserve’s part but most analysts believe the market has already priced in another rate cut, so if that’s not forthcoming, we could be in for a rough couple of months ahead.