On Friday we saw stock markets advance and snap a big two day losing streak. Although, unemployment in the United States inched up to 6.5% (14 year high), stocks still advanced because they are currently perceived as a bargain. As mentioned previously, all the economic factors are “pretty bleak” but stock markets are a leading indicator for what investors are expecting in the future.
Investors are nervous and it will require additional and aggressive interest rate cuts by Central Banks globally, the implementation of the Trouble Asset Recovery Plan (TARP), the announcement of various stimulus packages, a bottoming of U.S. residential real estate prices and other initiatives in order to avoid a deep recession and get us out of this mess. Addressing these factors will help give investors a sense of optimism.
I’m optimistic because we have seen some very aggressive and unprecedented initiatives implemented in order to address the problems and move forward. On the weekend, China “unveiled” a $586 billion plan to stimulate their economy (spending about 25% of their cash reserves versus adding to their debt like other nations). China accounts for 27% of global Gross Domestic Product (GDP) and with China spending more on infrastructure, tax deductions and farm subsidies we should see some positive price support for commodities (we are seeing a 5% spike in oil and copper prices this morning). In addition, world leaders at the G-20 Summit urged for further interest rate cuts.
The London Inter Bank Offered Rate (a.k.a. LIBOR) which is the rate that banks charge each other for 3-month loans dropped to the lowest level since Nov. 5, 2004 to 2.24%, according to British Bankers’ Association data.
In short, credit markets are getting better with the drop in LIBOR. The economy is bleak but we are seeing governments cut interest rates (thereby encouraging spending), we are seeing more government spending on infrastructure and stock prices are valued on the low end of their historical range. Hence I’m an optimist!
I would expect stocks to post similar gains today as they did on Friday. Hold the course! Holding the course can be painful and frustrating but with a prudent level of diversification it will lead to higher returns. A frozen credit market wasn’t supposed to happen but given the amount of money that is being allocated to the problem it should be resolved at some point.
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
P.S. I’m going to be traveling a lot on the next couple of days thus, I don’t know if I can keep up with my blog on a daily basis (time zone etc….)
