The Wild Ride: Stocks to Oil to Interest Rates

There are rumors that half of Wall Street had to visit emergency rooms this past week. They were all suffering from motion sickness. And what a wild ride it was. From a budget deal to a credit downgrade to a Federal Reserve Meeting all in one motion. Really, no one knows how this will all play out, but we do know this — Stocks have undergone a significant correction and the bottom line is that we finally have a reaction to the slowdown in the economy. The pieces are falling into place with extraordinarily low rates and oil prices down 20% in a two week period. We also know that everyone is afraid to blink because all of these numbers could reverse themselves in few days because of the extreme volatility. The Fed statement regarding rates and the economy was also extraordinary. Typically the Fed does not give a hint with regard to the future direction of rates, at least beyond a month or two. Now they are all but guaranteeing low rates for two years and will consider future actions to bolster the economy.

The Fed definitely acknowledged that the economy was growing too slowly and that there is more risk to the downside at the present time. One factor after another has affected the economy’s performance, from earthquakes to floods to the European debt crisis. Now budget cuts stand to take some more air out of the recovery. Many are asking, are we heading for another financial meltdown? “Not likely” say most analysts. This is not 2008. The economy is growing, albeit slowly. We added just 100,000 jobs last month, but it was better than the hundreds of thousands we were losing monthly a few years ago. Retail sales grew by 0.5% in July which means that consumers are spending. Companies, including many banks, are flush with cash and have the ability to hire as soon as it is evident that the economy will not fall back into recession. Finally, it should also be noted that the Fed controls short-term rates directly and long-term rates indirectly. Even with the Fed holding short-term rates low, if the economy does start to heat up, long-term borrowing costs will go up regardless of the Fed’s efforts. This is a great time to refinance, purchase a house or a car and help get the economy rolling.


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