Market Commentary - March 19, 2009

Unexpected news from the latest meeting of the Federal Reserve drove the stock market higher on Wednesday, pushing the rebound in the Dow Jones Industrials and the S&P 500 indexes up close to 15% from their 12-year lows only a week or so before.  The volume of trading, heaviest for the year, contributed new hope to some investors that the rally was a sign that the bottom of this market downturn had been established. They also point to other economic indicators over the past week that at least things were becoming “less bad”; the needed signals before hope for recovery can begin. Some data suggest retail sales, home building and manufacturing were declining more slowly. Because the stock market can be an early indicator of the economy’s direction, those waiting to see jumped at the chance for some kind of positive news.

The recent Fed announcements were initially seen as further help for those areas that remain the keys to getting things straightened out --- the credit system and housing. Reaffirming their support for the many independent Treasury programs, the Fed’s actions to push more money into the system are primarily meant to drive interest rates lower for all parts of the economy. By buying Treasury bonds from the market, the Fed reduces the attractiveness of the bonds returns, making investing and lending to other riskier businesses and individuals more attractive for banks. In essence, it will help to free up the still clogged lending machinery. The housing market should be a particular beneficiary as mortgage rates are tied most closely to the 10-year Treasury rates. It could be an important help if first day results are an indication. On the Fed news the Treasury bond yield dropped to approximately 2.5% from 3.0%, while the 30-year fixed mortgage rates fell to 4.75% from over 5.0%. ¹

The Fed’s bold action, although discussed by analysts as a possibility for months, was seen more negatively by some;as a need for more urgent action to turn the economy. Gold rose and the dollar fell.  If the economy remains weaker than expected, the market’s rebound could be temporary. However, for many investors, while it may take longer, the action is further encouragement that the Treasury and the Federal Reserve continue to support each other in solving the basic problems. Market movements will likely continue to be tied to developments in Washington and could remain quite volatile in the short-term.

¹ Wall Street Journal, 3/19/09

Prepared by:   Martin J. Cosgrove, CFA, Director of Investment Research
Research Department/ING Advisors Network

The views are those of Martin Cosgrove, Director of Investment Research, Research Department, ING Advisors Network, and should not be construed as investment advice.  All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.  All economic and performance information is historical and not indicative of future results.  Investors cannot invest directly in indices.  Please consult your financial advisor for more information.

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