Uncertainty Drives Stocks to New Lows

Treasury prices rose in holiday-shortened trading as stocks hit 12 year lows amid the cloud of anxiety which now surrounds the markets. Bank stocks were at the center of attention but the equity damage crossed sector lines. A combination of massive uncertainty and growing discord is once again pushing investors into flights-to-quality. The uncertainty should have been eased by the Obama administration’s housing relief plan which was unveiled on Wednesday and the enactment of the spendulus plan which the President signed on Tuesday. Instead, the housing plan, which did include many details, triggered discord between those expecting to benefit from the relief and those who will just get to pay for it. The banking sector, both stocks and bank management, continue to struggle with the many uncertainties and rhetoric which are circling. Large banks continued to be in the cross hairs as officials spoke begrudgingly and conceptually about nationalization. The market seems to need a more rapid triage of the banks than the government can deliver. Until then, separating the winners from the losers is very challenging for investors. At the same time, banks are uncertain as to what new government requirements will emerge next as continually changing rules and expectations are promulgated in order to stimulate the economy and bring relief to consumers. Unfortunately, it is impossible for the clarity the markets need to be delivered quickly enough. A kinder tone might help in the absence of clarity. In addition to stocks, gold benefitted from a flight-to-quality and rallied to over $1000 per ounce at one point. Oil was fairly volatile but remains in the recent trading range. The rally in Treasuries, while fed by stocks’ weakness, was impressive given the record supply which has been absorbed nicely. On the economic front, the light calendar produced no major surprises but did hit new milestones. Continuing jobless claims hit their highest level on record and CPI failed to rise on a year-over-year basis for the first time since the ‘50’s. Fed Chairman Bernanke offered little hope as he gave a downbeat assessment of the economy. The coming week will feature a light economic calendar but will include Bernanke’s semi-annual testimony before Congress and continuing information about government plans for the banks. Investors have plenty of options to choose from as wide spreads persist, especially in the mortgage and municipal sectors.

Investors will be busy this week as they try to focus on a whole host of economic activity which includes continued banking sector concerns, Fed Chairman Ben Bernanke’s semiannual testimony before Congress on Tuesday and Wednesday, a weighty Treasury auction schedule and a glut of housing data scheduled Tuesday, Wednesday and Thursday. With the funds rate target currently at zero to 0.25%, expectations for Fed policy show the funds rate will likely remain in this range through April. Today is the lightest day of the week with only the Dallas Fed Manufacturing index due to be released.