Wall street rallies - but till where do we go on this ride!

Tuesday’s late-day surge on the Federal Reserve’s aggressive actions looks likely to be turned around, at least in the early going. Stock futures suggest a pullback from the rally that took the S&P 500 up by 5.1% in the wake of the Fed’s move.

The central bank has, for the time being, done away with interest-rate targeting, and is now focused on re-inflating the economy through money printing and the outright purchase of securities. But this is going to be a long process, and the mixed record of such efforts in Japan suggests a perilous road for the U.S. slide-rule committee.

“If U.S. equities fall today, such will reflect the fact that the Fed only took such aggressive actions because of the dire state of the economy,” write analysts at RT-ICAP. “Moreover nothing it announced or did yesterday is going to prove an immediate panacea. Even though mortgage rates fell sharply further yesterday, it is going to take months to rebalance housing, the crux of the recession.”

Though rates on agency and mortgage paper declined in the wake of the Fed’s move, the action in Treasurys has been more dramatic, as the 10-year yield fell to 2.149% this morning, while the 30-year bond is at 2.615%, down from 2.735%. Analysts anticipate a further flattening of the yield curve, as short-term rates will no longer trade on the possibility of further interest-rate reductions.

The rapid succession of interest-rate cuts by central banks around the world has resulted in improved sentiment among global investors, according to Merrill Lynch’s most recent global fund manager survey. The December survey shows that fund managers “see the rate of deterioration in the global economy as slowing,” as cash levels declined a bit. Still, investors are looking for another year of below-trend growth, and are staying on the defensive, gearing investments toward healthcare, telecommunications stocks, utilities, and consumer staples.

Permalink | Trackback URL: http://blogs.wsj.com/marketbeat/2008/12/17/rethinking-the-fed-induced-rally/trackback/
Save & Share: Yahoo! Buzz | Share on Facebook | Del.icio.us | Digg this | Email This | Print
Read more: Crisis on Wall Street, Credit, Market Strategy, Bonds, Federal Reserve