Personal Finance Advice

The Fed’s surprise rate cut of 75 basis points stunned investors on Tuesday.  Coming on the heels of an overseas sell off when Wall Street was closed for trading on Monday, it still couldn’t stop the market from falling sharply as investors worried that this move only confirms their worst fears, that a recession is on the horizon.

After taking a couple of days to digest the move the market rebounded with financial stocks leading the way.  On early trading yesterday the Dow Jones was down over 300 points before making a 600 point rally to finish the day up 300.  The rebound may have taken longer to materialize due to the troubling news on the tech front as both Apple and Motorola are expecting lower earnings this year. 

There is still concern though because European Central Banks are not following suit with their own rate cut.  You can expect exchange rates to fall even further in the near future because of the imbalalance in interest rates.

Is this a panic move by the Fed?

I don’t believe so, one would think they would have made the move anyway after their regularly scheduled meeting later this week.  However, due to turbulence in the global markets they must have felt that initiating the rate cut early would help mute its effects.

I believe it was a smart move on the Fed’s part.  If they had waited until after the meetings, who knows how much the market would be down by then.  At that point many would have considered the 75 basis point cut as a panic move.

President Bush has unveiled a $140 Billion economic stimulus package in attempt to forestall an economic downturn. However Wall Street reacted negatively to the news as stocks fell sharply.

Many investment analysts criticized the move as being to small to have any appreciable affect in the short run. Some also believe that when it finally does take effect the economy may already be in a recession.

The economy has been plagued by the triple whammy of a slumping housing market, tight credit market, and soaring energy and commodity prices. A weak holiday season has also renewed fears that consumer spending is falling.

Many investors are calling for the Federal Reserve to do more and believe that it is monetary policy rather than fiscal policy that will determine the fate of the economy. It is believed that rates must fall by at least another full percent in the upcoming months.

This may not keep the country out of recession but it may shorten the recovery time immeasurably. While the economy has been quite resilient thus far amidst the gloomy news in recent months, many feel that it won’t last much longer.

Some analysts say a recession is coming and some say it isn’t. What is for certain is that the stock market has grown increasingly volatile since the summer. While this increases the risks for investors it also increases the chance for reward.

Large movements swings have been the norm the last few months depending on whether the daily news was good or bad. If you had idling cash lying around it would open the opportunity for some serious bargain hunting. There are quite a few stocks that are trading below their historical PE or price to earnings ratios.

Now the big question for many bargain hunters is whether it’s time to jump back into financial stocks or not. There are some big names out there that have lost a large chunk of their market values after they started reporting huge writedowns during the month of November.

While some of them do look tempting, I believe it’s still too early to jump back into financials.  Another surge in defaults is expected after rates adjust upward this quarter for the many ARMs that weren’t affected by the government’s bailout plan. There is also the fact that we are still in a credit crunch and while we may get it under control sometime soon in this country, that may not be the case for the rest of the world.

The housing market is also expected to continue it’s slump well into this year and possibly the next. So, while the financial sector may get it’s house in order and implement smarter lending practices, at least in the short run there just won’t be as many avenues open for profit potential as there were in the past.

However, this is definitely a sector that needs close attention in the next few months. Finding the right time to get back into these stocks should net you a tidy bit of profit as they climb back to their historical PE levels.