Market Advisor

Q4 2007 Monthly U.S. Stock Market Overview: Summary of Market Index Performance and Relevant Market Drivers

September has been a good month for the U.S. stock markets. All four stock market indices (Standard & Poor’s 500, NASDAQ, Russell 2000, and Dow Jones) showing converging gains in the month of September 2007. The Russell 2000, an index containing 2000 various small cap stocks, showed the lowest return. The Standard & Poor’s index returned over 3.5%, the NASDAQ returned over 3.2%, the Russell 2000 modestly returned over 1.6%, and the Dow Jones returned almost 4.3%. It is more reassuring for investors in the stock market to see converging returns in all of the major indexes.

A recent and significant economic event that could be providing some fuel for the current rally in U.S. the market is the recent Federal Reserve decision to lower the federal funds rate by 50 basis points from 5.25% to 4.75%. The federal funds rate is the interest rate that the Federal Reserve Bank charges commercial banks for overnight deposits. Overnight deposits are used by commercial banks that are short in their balance of bank reserve balances per the reserve requirements. The federal funds rate sets the tone for the interest rate environment and decreases in the federal funds rate increases short-term liquidity (good for mortgage loans).

The housing downturn is having some significant spillover impact into overall corporate earnings in the U.S. This is especially true for companies that are more dependent on U.S. consumers. The recent trends in housing prices have decreased overall wealth and purchasing power. Higher gasoline prices have not exactly been too kind to the U.S. consumer either; even further decreasing purchasing power. Both of these factors will have an impact on short-term earnings.

Inflation is important to discuss because inflation puts upward pressure on prices and this does not benefit the U.S. consumer. If the U.S. consumer is unhappy with price levels then they will be spending less which means corporate profits will start declining. The most basic inflation measure is known as the Consumer Price Index (CPI) which is a bundle of goods relevant to an average consumer. Core CPI is a bundle of goods that excludes more volatile elements such as food and energy. Inflation is also a measure that the Federal Reserve looks at and they have a pretty big say on the future inflation rate environment.

Overall, the four U.S. market indexes show converging trends in the most recent three months with August in trading range breaking through the 200 day moving average. The U.S. stock market has been in an uptrend for the month of September indicated by all four indexes converging towards new highs. The only exception is the NASDAQ breaking through new highs (new high at 2701.5 at the end of September) and still going toward 2800.