Another volatile week on Wall Street began as stocks sold off hard on both Tuesday and Wednesday only to rebound sharply by mid-week. The Dow Jones Industrial Average at one time was down by over 460 points on Tuesday but following another emergency rate cut by the Fed reversed course to end the day well off of its lows. By the end of the day, the Dow had lost only 128 points (-1.1%), it’s first close below 12000 since October of last year. Wednesday’s action was another roller coaster ride as blue chips lost 326 points by midday but rallied to end nearly 600 points off of its lows. It was the best one day percentage gain for the Dow since late November on near record volume. For the week, the Dow gained 108 points (+0.9%) as it closed at 12207, it’s first up week of the New Year.
In typical bear market fashion, the growth oriented NASDAQ underperformed the Dow as Apple Computer and Google pushed the index lower. Tuesday’s activity alone pushed the index down by 2.0% while the Dow lost only half as much. For the period, the NASDAQ gave back 14 points (-0.6%) closing at 2326.
We expect the up and down volatility to escalate later this week as the Fed holds its regularly schedule January meeting to decide if further rate cuts are necessary. The whisper on the street (SHHH, don’t tell anyone) is an expectation that the Fed will cut by an additional one-quarter of one percent. Hang on to see how the market responds…
The Appleton Group Composites™
The significant value exhibited by all of our portfolios this year remains intact. All six of our managed portfolios are either sporting meaningful gains so far this year or are experiencing sharply smaller losses than the overall market indexes. The markets are doing what they always do (always have, always will) and that is to be volatile. By far the most common historic characteristic of any one-year market performance is a gain of 10% or more. Historically this occurs more than half of all years. However, the next most common outcome is a loss for the year! This occurs almost one-third of the time. It is with these characteristics in mind that The Appleton Group Wealth Management Discipline™ is built. We are engineered to participate nicely in sustained market advances (a very common occurrence) and to be largely insulated from the negative effects of sustained market declines (another common occurrence). Eliminating risk isn’t the goal, but selectively incurring reasonable risks is, with the expectation of meaningful gains over time while working to provide a whole lot of comfort along the way. What else is there?
While the Fed was on the case last week with an emergency rate cut ahead of their regular meeting, the market response has been mixed. One camp (the bulls) cheered Mr. Bernanke’s boldness and heroism for giving the market exactly what it wanted. The other camp (the bears) argued that the move was done out of panic, that the Fed is caving in to what the market wants rather than providing true leadership, and that the move was far too late. However, I’d like to throw in my two cents: the problem we have is really one of overcapacity (too many condo projects, too many strip-malls, too much vacant office space, too many new homes on the market) and by lowering rates once again the Fed is simply adding fuel to the fire. In theory, lower rates will make it so attractive for new projects to be built that developers simply won’t be able to help themselves – they will have to borrow money and build, build, build. The Fed’s decision this week will be as important as ever, as they will have to decide between a bit of short-term transitional pain while the overcapacity gets absorbed, or they will offer additional fuel to a fire which simply doesn’t need stoking. Either way, it will certainly be interesting.
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