US Market tries to consolidate

Market succeeds in gaining back some of its January losses

US Market tried coming to the recue of its battered stocks during the week that ended on Friday, 01 February, 2008. Earning reports, economic reports, Federal Reserve's crucial verdict on interest rate and lastly, Microsoft's bid for Yahoo on the last day of the week, dominated the headlines for most part. Other than that, there was bond related news. But market indeed succeeded in gaining back some of its substantial losses that it suffered during January, 2008.

The Dow Jones Industrial Average gained 536 points for the week. Tech - heavy Nasdaq gained 87 points. S&P 500 gained 36 points.

The prospect of further rate cuts, and then the rate cut itself, fueled the bullish bias that had been missing for most of January. Market ended higher on the first two days of the week.

On 30 January, Wednesday, The Federal Open Market Committee decided to cut the fed funds rate 50 basis points to 3% and the discount rate 50 basis points to 3.50%. This was on top of last week's 75 basis point intermeeting cut in the fed funds rate to 3.50%.

The central bank also said that the credit markets in US remain under "considerable stress." Fed's statement also added that credit has tightened further for some businesses and households. The housing slump is getting worse, and there's new weakness in some labor markets.

But the reaction to Fed's decision was very limited on that day. Market was soon gripped by news that one of the two major bond insurers was going to be downgraded by a credit rating agency. It was also reported that Ambac and MBIA, two bond insurers will lose more money than they are currently predicting from guarantees sold on complex mortgage-related securities.

On Thursday, 31 January, market opened lower initially on a disappointing economic report. But some encouraging outlook from bond insurers turned around the investor sentiments and the indices rallied for the rest of the day. The Labor Department reported today that the number of Americans filing first-time claims for unemployment benefits rose to a 27-month high. But then, the turnaround in sentiment came after bond insurer, MBIA offered assurances that it had enough cash to ride out the meltdown in the mortgage market.

On Friday, 01 February, market showed good resilience even after a weak non farm payroll data. Labor Dept reported that U.S. employers cut back their hiring in January for the first time in more than four years. Nonfarm payrolls fell by an estimated 17,000 in January. This was the first decline since August 2003. But market shrugged off the report and the indices ended substantially higher for the day.

Among major important earning reports during the week, McDonald's topped earnings expectations while Verizon came in-line with expectations. 3M and UPS reported fourth quarter earnings topping estimates. 3M also reiterated its 2008 guidance. Boeing beat Wall Street expectations. Merck reported a fourth quarter loss. Google earnings fell short of expectations.

On the economic front during the week, December durable orders rose 5.2%, larger than the expected 1.6% rise. Excluding transportation, orders still rose a healthy 2.6%. Other than that, the Conference Board said January consumer confidence stood at 87.9, down from December's revised reading of 90.6.

Among economic reports, Dept. of Commerce said December personal income rose 0.5% and spending rose 0.2%, which were mostly in-line with expectations. Market expected income to rise 0.4% and spending to rise 0.1%. The report's price index for personal consumption expenditures, a gauge of inflation closely monitored by the Fed, rose 0.2% in December from November levels. Fourth quarter employment costs rose 0.8%, in-line with expectations.

Executive Summary

For the week, indices tried regaining back most of January's losses and the indices registered substantial gains. DJIx and S&P 500 closed up by 4.2% and 4.9% respectively. Nasdaq closed up by 3.7%.

US stocks tried to regain further ground during the week as Fed slashed interest rates by another 50 bps. Market smartly ignored a couple of weak economic reports. Earning reports continued to dominate the headlines and were mixed in nature. Bond insurers sent some nervousness initially but banks are trying to come at their rescue. Microsoft offered its bid for Yahoo for the second time.

US and the world are currently extremely worried about chances of the US economy plunging into recession. US business pundits are trying all sorts of recession warding plans. But, nothing is of sure, as of now. For the year, Dow, Nasdaq and S&P 500 are down by 4%, 9% and 5% respectively.