Current Events: December 2007 Archives

On 11 October 2007 the S&P 500 index climbed just over 1576.  On 26 November 2007 it fell to nearly 1406.  Why in Sam Hill did the S&P 500 to drop more than 10% in just over a month?  I figure there are several reasons.  For example, during that period:

• The price of oil escalated to nearly $100/barrel
• The US dollar reached an all time low vs. the Euro
• Major financial institutions announced write-down after write-down, due to losses from mortgage-backed securities
• The media spread stories on the "credit crunch" and the "housing slowdown"

Today the S&P 500 reached a high of just over 1508.  What's different between now and then and why did we see a 100 point recovery in the S&P 500 from 26 Nov to 6 Dec?  The recovery might have to do with the following:

• Oil is trading for less than $90/barrel, with perhaps more downside since I figure some of the price increase was directly related to perceived risk of an American invasion of Iran (said risk has decreased after the much-discussed National Intelligence Estimate [NIE] was released earlier in the week)
• The dollar has recovered somewhat vs. the Euro
• The value of the write-downs may have been priced into the shares of financial institutions during the "correction"
• The media has been spreading word of a 25-50 basis-point rate cut at the upcoming Fed meeting on 11 December 2007
• President Bush outlined a plan to reduce the number of potential foreclosures by freezing some interest rates for certain mortgage holders

Let's talk about the interest rate freeze for a moment.  What short-term effects will that produce?

• Fewer people will lose their homes to foreclosure, but some are still out of luck.  These folks may have to negotiate to refinance at [ideally] lower rates*.
  
• More home-owners will feel better about their financial situations.

* The plan's details seem to add pressure to the Fed to continue cutting interest rates.  If interest rates go down, refinancing makes sense.  When interest rates go down, dollars shift from savings and money-market-esque investments over into stocks.  Stocks go up, and the bulls cheer!

Also, since the holiday season often produces a large proportion of annual sales for retailers, it's logical to assume that if people feel better about their home situations, they're more likely to spend more $ during this holiday season.  The macro-conditions listed above may have led to reduced expectations for retailers, and so if people spend more money than was anticipated, Bush's announcement may precede slightly higher-than-expected sales for retailers.  It might be a good time to look into buying some of your favorite retailer...

All in all, to me it seems economic conditions look much better than they did a couple of weeks ago.  Although the plan to freeze some mortgage interest rates may delay but not solve the mortgage "problem," perhaps a recession is farther away than many have predicted.  Whether a recession is around the corner or far off in the distance, people are buying stocks and life's looking good for bulls.

I don't know about you, but I'm ready to dig my heels in and make $ome money.  I hope you do the same.  Good luck!