Stocks jumped big time yesterday after the Federal Reserve (Fed) rewrote its playbook by “slashing” borrowing costs to a record low, even zero, and pledging more unconventional steps to fight the deepest recession in generations. Unconventional like buying up more mortgage-backed assets which are guaranteed thereby, injecting more cash into the economy as banks have more cash to lend. The Fed’s balance sheet has increased to $2.23 trillion from a year ago when it was at $800 billion. There is an unprecedented amount of money trying to make its way into the economy (it’s just hitting a lot of resistance along the way as people hoard cash).
U.S. banks led the charge higher as the quarterly loss from Wall Street icon Goldman Sachs was not as bad as many feared (although, this morning Morgan Stanley reported a loss worse then expected). Goldman’s stock gained more than 14% while the U.S. financial index jumped 11%.
The rate cut was definitely more than a lot of people were expecting and that’s really helping the market at this time (highest close in a month). Bernanke’s is really going back and trying to loosen things up in the credit market. They are really trying to go the distance.
The TSX Composite Index in Canada was up more than 3% with energy and materials leading the way. The Dow Jones industrial average rose 4.20%, the Standard & Poor’s 500 Index jumped 5.14%, and the Nasdaq Composite Index jumped 5.41%.
Stocks are a little mixed this morning (some profit taking has been offset by further optimism and bargain hunting) and investors focused on weak financial results from Morgan and the dismal economic outlook – there is a reason why interest rates are at zero in the U.S. There’s a good feeling from investors about the Fed statement but the economy is going to take a long time to resolve its problems.
OPEC oil ministers were meeting today in an attempt to remove a record 2 million barrels per day from oil markets in an attempt to balance supply with falling global demand for fuel. Also significant would be formal support from Russia, Azerbaijan and other non-OPEC producers of Mexico, Norway and Russia. Russian Deputy Premier Igor Sechin and Azeri Energy Minister Natik Aliev said that their countries would reduce output by a total of more than 600,000 barrels a day. Russian production is falling in part due to a lagging investment (hard to justify finding oil when you can buy it cheaper).
Regards,
Wilfred Vos Bcs, CFP, FMA, FCSI, CIM, CFA, MBA, DMS, CBV
SVP & Partner
