Market Volatility and Policy Responses—Don't Panic!

CHICAGO, January 29, 2008 — The events of the past few weeks have left investors, analysts and economists baffled. Stock markets around the globe collapsed as concerns about the state of the U.S. economy mounted. The economic data from December was generally weak, while the write-offs associated with the subprime debacle soared. Then, the Fed surprised investors with a somewhat ill-timed historic inter-meeting cut in rates. "The result was more panic than calm, and a further destabilization of financial market conditions," says Adolfo Laurenti, senior economist of Mesirow Financial, in his January issue of Themes on the Global Markets.

"This economy has some real problems. It has, however, proven itself to be remarkably resilient, especially for long-term investors. In the midst of a crisis, patience will always reward more than panic," notes Laurenti.

In his January newsletter, Laurenti addresses questions being asked by investors, and why, at the end of the day, we shouldn't let our emotions get the best of us.

• Are we in a recession? The short answer is no. That answer, however, fails to address the concerns about an economy that is decelerating-this was clearly the case in December. Economic data suggests that growth slowed but remained positive-in the range of 1%-in the fourth quarter. Preliminary data for the first quarter shows growth again in the 1% range, which precludes us from calling it a recession-at least "officially."
• Why did stock indexes drop? The deceleration in growth justifiably raised fears that the economy would slip into a recession. Recent efforts by the Fed and Washington to calm those concerns backfired, and investors panicked, resulting in a fairly substantial downdraft in major stock indexes.

• Will the Fed's recent rate cuts help? The Fed's 3/4% inter-meeting cut on January 22 was clearly designed to shore up confidence in the economy in the near term. Over the longer haul the Fed's move should stimulate growth by lowering the costs of funds and freeing up liquidity for investors and borrowers alike. The Fed's communications regarding monetary policy have been particularly uneven and, at times, have added more confusion than clarity to the market's perception of economic conditions.

• Will fiscal stimulus fend off a recession? Congress and the Administration acted with remarkable speed to put together a fairly large ($150 billion) stimulus package. In all likelihood, most families will not receive their tax rebate check until June, which could add fuel to an already re-kindled economic fire, but not support the economy much this winter.

"The moral of the story is: don't panic, buy low and be patient. Real-time data suggest an economic slowdown, not a recession. Even if a recession were to occur, it would likely be very short and mild, given the massive amounts of monetary and fiscal stimulus already in the pipeline. This means that financial markets, at least in the U.S., have overshot on the downside. Expect a summer much warmer and prosperous than the present winter," concluded Laurenti.

The January issue of Themes on the Global Markets as well as archived issues can be found at www.mesirowfinancial.com.

Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent employee-owned firm with $30 billion in assets under management and 1,100 employees in offices across the country. With expertise in Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate, Mesirow Financial has consistently met the financial needs of institutions, public sector entities, corporations and individuals. For more information about Mesirow Financial, visit its Web site at www.mesirowfinancial.com.

For more information, contact: Adolfo Laurenti, Mesirow Financial, 312-595-7129.

 

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