What a week! While the US market was only open for four days, there was no shortage of interesting information to digest.
First, the election of Scott Brown in the Massachusetts Senate race served to illustrate that voters have become dissatisfied with something. Of course, it depends on which pundit you ask but the possible culprits could include healthcare, unemployment, the economy or the environment. Whatever the cause, it cannot be denied that the tenor of the administration’s populist rhetoric was stepped up after the election. The markets have historically voted against this sort of political talk by selling off.
Second, the President announced his intention of limiting the size of big banks and reducing the potential for systemic risk by banning proprietary trading operations, ownership of hedge funds or private equity operations, forcing banks to sell these assets at fire sale prices. Even the President’s own Barney Frank argued against this rapid fire re-regulation of the banks. You can’t put the Glass Stegall genie back in the bottle so fast! Not surprisingly, the markets hated the President’s comments and sold off.
Third, international news is not good. There is growing evidence that Greece’s fiscal problems are spreading to other vulnerable European countries such as Spain and Portugal. Further, China, which recently initiated a massive stimulus plan is talking about raising interest rates in an effort to slow its economy down.
These news items helped send the S&P 500 index to a weekly loss of 3.9%. While we may be out of the heat of the financial crisis that engulfed us in the fall of 2008, last week’s action shows that risks remain and we always have to remain vigilant.