US stocks made a 1 month high on November 4th as the 2 ½ year long US presidential election finally came to a close with the widely anticipated election of Barack Obama. Stocks subsequently slid 15.3% over the next 5 trading days, ending near the lows for year set on October 27th, tracing out a 15-20% trading range in the S&P 500 with 1005 at the top, 850 at the bottom. Either the October 27th low of 848.92 holds, or it doesn't. If not, then market technicians look at 776 in the S&P 500 as the next floor - that was the low set during the last bear market which ended in October 2002. At the worst point today, US stocks were down 2.8% on the day, 14.3% on the month, 28.7% on the quarter, 42.6% on the year, and down 47.2% from the October 2007 high. However, at the close, the S&P 500 was up 6.9%, an intra-day swing of 11.3%.
Fundamentals haven't remotely changed in the last two weeks to justify these swings. We've discussed stock valuation at length in recent commentaries, but favorable valuations do not seem to drive investor decisions right now. So instead, let's detail what investors are focused on:
· The Credit Crisis
· Housing prices continues to fall
· Unemployment continues to rise
· Probable bankruptcy of General Motors, Ford and Chrysler
· Recession in the United States
· Media saturation of bad news
· Continued liquidation of hedge funds
· Can "Baby Boomers" retire?
Is there any good news at all?
The Credit Crisis
All of our current woes tie back to the period of 2003-2006 when low prevailing interest rates caused investors to seek out high yielding, but "safe," fixed income securities. Wall Street responded by underwriting vast supplies of mortgage and debt based securities, which, when push came to shove in 2007 and 2008, were worth far less than stated value. US banks, and later European banks, were forced to write down the value of these securities, by $900 billion to date. Bear Stearns, Fannie Mae, Freddie Mac and ultimately Lehman Brothers all broke under the strain. The failure of Lehman impacted the commercial paper market and credit default swaps markets, causing banks worldwide to run away from lending to each other, let alone actual customers. Peak fears were seen in soaring LIBOR rates on October 10th; the normal spread of 0.75% between 3 month LIBOR and 3 month T-bills jumped to 4.8%. That spread is way down now at 1.9%, so still about 1.1% higher than normal. Overnight LIBOR is back to normal, about par with Fed Funds.