For all that happened this week, the market ended relatively unchanged. On Tuesday, the Fed cut rates (again, surprise, surprise), from 1% to a range of 0 - 0.25%. Okay, so the cut wasn't a surprise, but the scale of it surely surprised me. Going into Tuesday, all the talk was that they would cut by 50 basis points. That in itself would have been big, slashing rates in half. But dropping it all the way to zero....
The stock market reacted very positively out of the box, skyrocketing 360 points to end the day up 4.2%. But it didn't last. Ongoing arguments about auto maker bailouts, TARP overhauls, general unrest and distrust in Washington, and other "noise" combined to take away all of Tuesday's gains over the successive 3 trading sessions. The week ended down, albeit very slightly (about 50 points on the Dow).
Inflationary pressures are easing, with overall US consumer prices showing a record decline for the second month in a row. Energy prices are obviously a big part of that, with gasoline in most parts of the country now selling below $2 per gallon. In fact, the price of gasoline declined 29.5% in November alone. Core CPI, which tracks changes in consumer prices without food & energy, was unchanged last month for the first time in 25 years (according to the Wall St. Journal).
The auto maker bailout looks like it is going to happen. This afternoon the White House announced a $17.4 billion package for Chrysler and GM. Ford has stated that it does not need short-term assistance. However, the deal requires that the companies show that they are "viable" by March 31st. If they cannot, the loans are immediately called and the funds must be returned. I would not expect that this is the end of the auto maker discussions. Much, if not all, is going to be left to the incoming administration to work through.
The government is doing what it deems necessary to prevent further economic erosion. And much of what is being done is indeed necessary, both psychologically and financially. The issue we have with it is that at some point the tap must be shut off (but when?), and more importantly, the bill is going to have to be paid (but by whom?). Paying for what has been done is not likely to be easy. It will likely result in higher taxes, not just for "the wealthy", but across the board. Moreover, the drag of taxation and the expense of the government's current activities could weigh on the economy for some time to come.
If you have any questions, feel free to contact me at nsnodgrass@evanstonadvisors.com
