Weekly Update – September 26, 2011

After the brisk market rally we experienced two weeks ago, the tables turned dramatically last week as many asset classes experienced their worst week in years. The Dow tumbled 6.4%, the S&P 500 fell 6.5%, and the Nasdaq slid 5.3%. Even gold shed nearly 10% over the course of the week for its biggest drop on a percentage basis in 28 years.

In conjunction with persistent concerns about European debt and a weakening U.S. economy, the presumed trigger for the panic was that the Fed’s Open Market Committee (FOMC) launched “Operation Twist” on Wednesday. The move, designed to bring interest rates down and stimulate the housing market, scarcely proved to reassure investors. “Operation Twist” calls for the Fed to sell short-term securities (maturing in three years or less) from its sizeable $1.7 trillion holdings of government debt and use the $400 billion raised to buy longer-term mortgage-backed securities maturing in six to 30 years.

At the same time, the Fed accompanied its announcement with a lukewarm (at best) assessment of the economy. While stating that they continue to expect some pickup in the pace of recovery over coming quarters, they cited “significant downside risks to the economic outlook, including strains in global financial markets.”

While the stock market has undeniably taken a big hit, and investor confidence has been badly shaken, few things fundamentally changed from two weeks ago. In essence, market participants reacted to renewed concerns that policymakers aren’t doing enough to stabilize the global economy.

Notably, the Group of 20 major economies, including the United States, European Union, and China, issued a statement Thursday saying that it stands committed to “take all necessary actions to preserve the stability of banking systems and financial markets as required.”

It is likely that we will continue to experience a period of volatility as investors wait to see if the words of policymakers lead to tangible actions.

HEADLINES:

Last week, the government released the latest census report showing the poverty rate rose to a 17-year high. A whopping 46.2 million people (or 15.1% of the U.S. population) live in poverty, and 49.9 million live without health insurance.

BP is preparing its rigs and workers to resume full drilling operations in the Gulf of Mexico, seeking to end a 17-month production slump following the worst U.S. oil spill.

The International Monetary Fund annual meetings wrapped up in Washington on Sunday with no immediate consensus on the solution. Participants said they were waiting for the ratification of the action plan agreed on July 21 by the Eurozone, particularly by the German Bundestag this week, before starting serious negotiations on increasing the rescue fund’s firepower or asking for a bigger write-down in private sector holdings of Greek debt.

For the first time in months, retail gasoline prices have fallen below $3 a gallon in places, including parts of Michigan, Missouri, and Texas. And the relief is likely to spread thanks to a sharp decline in crude-oil prices. The national average for regular unleaded gasoline is $3.51 per gallon, down from a high of $3.98 in early May. Last week’s plunge in oil prices could push the average to $3.25 per gallon by November, analysts say.

QUOTE OF THE WEEK:

Don’t judge each day by the harvest you reap but by the seeds that you plant. –Robert Louis Stevenson