Last month's newsletter discussed the potential for lower stocks in January based on a tough fourth quarter. That scenario ended up coming true, although the extent of losses was more than expected.
The world is a different place than it was just a few weeks ago. The Fed has reduced rates by 1.25% in this short period, in reaction to a weak economy and big losses in the banking sector. What does the market hold for investors now?
Although it would seem logical to assume that lower stock prices are a foregone conclusion, there are plenty of unknowns that could move the needle in the opposite reaction. Lower energy prices are a big factor, for example; if the U.S. is headed for a slowdown, as is commonly believed, sky-high crude is likely not sustainable amidst decreased demand. That would give the Fed more room to lower rates, which will undoubtedly help both consumers and corporations saddled with interest costs.
There are still several unknowns that could play out to the downside. There is some evidence that consumers are having a more difficult time paying off their credit cards bills. And it's hard to discern the extent of foreign bank investment in the crippled U.S. mortgage market. When all these factors see the light of day, in my view the most likely scenario at the end of 2008 is higher stock prices.
