The stock market was living for the moment last week. It rallied in response to strong retail sales, then took a 250 point nose dive at the end of the week over a poor jobs report. Problems with the subprime mortgage market and securitized debt of all types lurk in the background. The big question is what will the Fed do next Tuesday? An article in the New York Times over the weekend said a rate cut of 25 basis points is a sure thing. The only question is whether the Fed would cut fifty.
The New York Times has a much larger circulation than this blog and many times the number of reporters (I have only me), but I think they’re wrong on this one. Mr. Bernanke is not going to cut rates to placate a bunch of wealthy Wall Street types who are crying because they’re no longer minting money. So I’m going to that the other side of the bet.
The Fed will not cut rates next week. The US economy is strong, the world economy is strong, the mortgage and securitization problems are being worked out in an orderly manner and one bad jobs report doesn’t mean we’re headed into a recession. Lastly, Mr. Bernanke will show Wall Street that he doesn’t work for them.
My scenario suggests another choppy week for the market this week, a decline next Tuesday (the 18th) afternoon, although not as much as some would expect, then a slow upward trend.
