Expectations about another interest rate cut help ease concerns in housing and credit markets
US Market started off the week on a weak note on Monday, 26 November but market picked up momentum in all the rest of the four days of the week that ended on Friday, 30 November, 2007. Comments from Federal Reserve Vice-chairman Donald Kahn during the middle of the week and from Ben Bernanke on the last day of the week was the main reason for market to get some encouraging hints about another rate cut and indices soaring upwards.
Crude price tumbling down to lowest level in a month also provided some good support to the market. Oil prices closed almost 10% lower around $88/barrel at the end of the week on talks that OPEC will increase production. An upward revision of third quarter real GDP to a very strong 4.9% annual growth rate from a previously reported 3.9% was welcomed by the market.
The Dow Jones Industrial Average gained 390 points for the week. Tech - heavy Nasdaq gained 64 points. S&P 500 gained 40 points.
Market started off on a shaky note on Monday, 26 November, 2007 after credit market turmoil once again rocked the market. Citigroup weighed on overall market after reports that the company might lay off as many as 45,000 workers because of the subprime-mortgage crisis. Dow and Nasdaq went down by 267 and 55 points respectively.
On Tuesday, 27 November, it was same Citigroup that helped market erase most of prior day’s losses after reports that an Abu Dhabi Investment Authority (ADIA) will invest $7.5 billion to acquire a 4.9% stake in Citigroup. The investment will make ADIA the bank's largest shareholder. Dow and Nasdaq went up by 215 and 40 points respectively.
On Wednesday, 28 November, Fed’s Vice Chairman, Donald Kahn took market up after he said the Fed must be "flexible and pragmatic" in policy. Market took his comments as if he was hinting at another quarter to half a percentage point interest rate cut at the 11 December policy meeting. Financial sector was once again centre of everyone’s attention on reports in the Wall Street Journal that Citigroup and Bank of America were contemplating a merger.
On Thursday, 29 November, indices once again closed modestly higher with the Dow gaining 22 points and Nasdaq higher by 5 points with the market digesting mixed bag of economic reports. Disappointing profit reports from some retailers and news of a pipeline explosion in the Midwest also took some steam out of market on that day.
But on Friday, 30 November, a speech by Ben Bernanke, cheered investors after he hinted clearly at another interest rate cut in the coming month. In his speech he acknowledged that the renewed turbulence in the financial markets over the past month has affected the economic outlook, as there could be additional restraint on housing market activity and other credit-sensitive sectors. Market ended mixed with Dow gaining 60 points but Nasdaq slipping by 7 points.
On the earnings front, Sears Holding posted a third quarter profit which was a whopping 99% drop in earnings compared to a year-ago. Dell, the world's second largest maker of personal computers, reported a higher quarterly profit, but provided a cautious outlook due to a less favorable component pricing environment.
Among major economic news hitting the market during the week, October durable goods orders were sluggish. Also, October existing home sales came in at a 4.97 million annual rate. That is close to the expected 5.0 million rate, and down 1.2% from September's 5.03 million rate.
Other than the above, the November Chicago Purchasing Manager’s Index survey on regional manufacturing conditions rose to 52.9 from 49.7 in October, while October construction spending fell 0.8%, with residential spending down 2.0% and non-residential spending up 0.1%.
Executive Summary
For the week, indices registered very good gains. DJIx and S&P 500 closed up by almost 2.9% each. Nasdaq too gained 2.5%. Encouraging comments from Federal Reserve Chairman and Vice-Chairman on two separate days of the week made investors look forward to another interest rate cut in December, 2007.
Crude prices slipping by almost 10% and closing at almost at lowest level in a month also added to positive market sentiment. The economic reports that came out were more or less positive in nature. An upward revision of third quarter real GDP to a very strong 4.9% annual growth rate from a previously reported 3.9% was a strong economic piece of news for the market.
For the year, Dow is up by 7.3%, Nasdaq is up by 10.2% and S&P 500 is up by 4.4%.