Without a doubt, what could have been a horrific trading session was headed off before the opening bell due to the Federal Reserve’s action. But the concerns about the handling of the current economic downturn have only multiplied. Analyst views of the Fed fall broadly into three camps — those that think the Fed is way behind the curve; those that think the Fed has become beholden to the markets, and those who believe the Fed is doing a masterful job. (This third group is more of a cult at this point, though.) Phil Orlando, market strategist at Federated Advisors, says today’s moves means “we can safely say that the Fed’s quarter-point cuts in October and December were now policy errors,” he says. “In retrospect, the Fed should have been more aggressive.” However, there’s also the concern that the Fed is running low on ammunition at a time when the housing and debt markets could certainly worsen. Wachovia’s conference call today, where officials noted that an increasing number of people are simply walking away from their homes rather than paying down mortgages, certainly suggests that economic problems won’t be headed off by today’s interest-rate cut.
Sure, MBIA and Ambac Financial Group suffered massive contractions in their share prices last week, but the 47% and 29% rallies are still mind-boggling. Throw Keycorp (+12.6%), M/I Homes (+10.7%) and Downey Financial (+12.1%) into the mix as well to represent one frequent occurrence during a bear market — a bear market rally, one of the more volatile creatures to walk the planet, striking without warning. Kevin Depew of Minyanville.com explains that stocks, in general, trend upward because “psychologically speaking, greed is a far more lasting and motivating factor than fear.” But these rallies are essentially fearful ones — founded on concerns that the greed of others will outweigh one’s own fear. Author and veteran trader Michael Panzner says that bear-market rallies are “more motivated by short-sellers fearful of losing tremendous amounts of money in a short time.” After all, someone with a long position in a stock can continue to hold a losing position; short-sellers have a margin call to worry about eventually.
Investors will either look back at the slew of commentators who argued vehemently that the economic situation was not bad at all and find them to be brilliant contrarians or completely insane. The U.S. economy may not end up in a recession, indeed, and the number of economists jumping on this bandwagon now to proclaim that one is on the way comes across as a bit of butt-covering, but those railing against this as a media-created condition may have much to answer for in coming quarters (or they’ll have people kissing their feet in droves). Brian Wesbury, chief economist at First Trust Portfolios, was on CNBC this morning not only saying the economy wasn’t in recession, but adding that it was “not going to have a recession…I’m shaking my head that anybody even thinks we’re in a recession right now.” Robert Pavlik, chief investment officer of Oaktree Asset Management, acknowledges that the economy has slowed, but says if a recession happens, “it will be brought on because of a self-fulfilling prophecy causing fear to reign in consumers and businesses spending plans.” But just as greed begets greed, fear can certainly beget fear. It’s happened before.