At the end of 2007, I noted the impressive resiliency of equity markets to the deepening crisis in the credit market. While the credit markets remained as wobbly as ever, equity investors finally lost their cool, hitting the sell buttons often and hard.
The worldwide selling panic hammered all equity sectors. The sole exception was a handful of senior precious metal producers benefiting from strong metal prices. Collapsing stock prices were probably one of the reasons behind the Fed’s panicky decision to cut both the federal fund rate and the discount rate by an unprecedented 0.75%.
The making of huge interest-rate cuts without waiting for the scheduled monthly FMOC meeting demonstrates how seriously worried the Fed had become about the state of the financial markets and the economy. Inflation concerns that had driven the Fed to increase its benchmark interest rate from one percent in July 2004 to 5.25% by June 2006, and holding it there until September 2007, became secondary to the rising odds of a recession.
The deep cuts in interest rates have, so far, provided only short- lived relief to the stock market. Though Wall Street cheerleaders continue to hype the historically bullish implication of declining interest rates, the bull market of the late 1990s and the subsequent 2000-2002 bear market have defied this historical pattern. When learning from history, the more recent the history, the more worthwhile its lessons.
During the 2000-2002 bear market, it took two years and a decline in the federal fund rate from six percent to 1.25% before the stock market finally bottomed out in late 2002. The bursting of the hi- tech bubble in 2000-2002 was costly, but it was confined to a few sectors. While the new economy darlings got vaporized, the broad spectrum stocks of old economy companies were already in the early stages of their own 2000-2007 bull market.
As painful as the bursting of the hi-tech bubble was, its eventual effect on the economy was minor in comparison to the impact the trillions of dollars worth of losses in the financial sectors could have on the global economy. It will take further interest-rate cuts and, as the latest White House/Congress rescue package demonstrates, “throwing out cash from helicopters” to rescue the economy from the brink of a recessionary abyss.
The January 2008 global breakdown in equity markets only confirmed the bear market signals from the Dow Theory flashed on November 21, 2007. Make no doubt about it, and no matter how much cash the Fed wants to throw from a helicopter, we are in the confines of a old-fashioned bear market, where all big-cap stocks will move lower in price over time.
[For the past 25 years, Anthony Jasansky has been editor of “Market Insider Bulletin,” a newsletter that tracks the actions of corporate insider buying/selling to determine general stock market direction. His column appears monthly exclusively in PROFIT CONFIDENTIAL.]