Whiplash on Wall Street

The Fed cut interest rates by another 50 basis points yesterday, bringing the Federal Funds target rate down to 3.00%. Less than two weeks ago it was 4.25%. Observers disagree on exactly how much this move will help the economy, but it is certainly helping the banks. With lower borrowing costs and a steeper yield curve, lenders are suddenly in much better shape. This is being reflected in financial sector funds for now, but there is still a long way to go before long-term trends can be called bullish.

Over the years we have noticed a phenomemon that may seem odd to some readers. The happiest and, in some ways, the most successful investors are often those who pay little or no attention to the markets. Such people are particularly lucky right now because they are not straining their necks trying to follow the ping-pong action of the stock market. Those of us who, either by choice or for professional reasons, must watch the day-to-day action are seeing more and bigger swings in the major benchmarks. It's not all in your imagination. According to The Wall Street Journal, in the first half of 2007 the Dow Jones Industrial Average had an average daily range of about 112 points. Since July 2007, the average daily range has been almost 200 points. So far in 2008, the average daily range is 285 points.

Why the volatility? We do not have a completely satisfying explanation. All we can do is observe events and try to adjust accordingly. Obviously 2008 is not off to a great start. Practically every index benchmark, and most sector and international funds, is experiencing short-term weakness. In many cases the intermediate and long-term trends are negative as well. It would be easy to give up and hold cash, yet in doing so investors simply create a different kind of risk: the risk of being out of the market when it turns around. If sentiment indicators are to be believed, the turnaround will happen soon. For many investors, it can't be soon enough.

Today's rally was helpful but much technical damage remains to be repaired. We suspect some near-term consolidation is likely, and we do not rule out a reversal and retest of the lows.