Market Recap

Extraordinary! Some might say disastrous, abysmal, even horrific, but those words are too apocalyptic, though one could be forgiven for invoking them. Why the rampant pessimism? In one short week, the Dow Jones Industrial Average lost 20% of its value. Paper losses for the stock market sum to a staggering $8.3 trillion, according to preliminary figures measured by the Dow Jones Wilshire 5000 Composite Index. Copious stock losses coupled with grinding losses in home values means more people are feeling a heck of a lot poorer these days.

Fortunately, the problem – jammed credit markets – is being worked. Central banks around the globe cut interest rates Wednesday in a coordinated move. The Federal Reserve lowered its federal funds rate – a benchmark rate for short-term lending – a half point to 1.50%. Meanwhile, central banks in the United Kingdom , European Union , Switzerland , Sweden , China , and Canada trimmed lending rates as well.

The Fed's rate cuts follow a string of innovative actions in recent days. On Monday, the U.S. central bank said it would pay interest on bank reserves. On Tuesday, the Fed said it was creating a special facility to support the commercial paper market, a wellspring for funding the day-to-day operations of many businesses.

The Treasury Department is also upping the innovation ante by considering taking ownership stakes in many U.S. banks. Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to increase lending.

Unfortunately, the lack of immediate improvement is frustrating capital markets. While the financial turmoil is clearly expressed in global equities markets, the root of the problem remains the interbank market, where tensions remain high. Banks are still too nervous to lend freely to one another, and that's causing credit markets around the world to seize.

Value Driven Activity

Yes, the news is decidedly negative and the current financial crisis is frustratingly recalcitrant, but it's not terminal. People continue to work, spend, invest, and, yes, even borrow. Mortgage markets really are open for business. Indeed, mortgage applications rose 2.2% in the week ended October 3, the Mortgage Bankers Association reported last week. Even more encouraging, applications for new purchases grew by 3.2%.

Affordability has been the driving force behind the up tick in mortgage activity. The prime 30-year fixed-rate mortgage averaged 6.19% and the prime 15-year fixed-rate mortgage averaged 5.95% last week, according to Bankrate's latest national survey. Rates are now well off their midsummer highs and are considerably lower than they were this time last year. In other words, there is mortgage money to be found; if there weren't, rates wouldn't be falling to entice people to borrow.

Affordability is also driving home sales. Optimists are venturing back into the housing market – particularly in hard-hit former hot spots throughout California, Nevada, Arizona, and Florida The number of home-purchase contracts signed in August, before the tumult hit Wall Street, rose 7.4% from July. The boost brought the pending home sales index to its highest point since June 2007, NAR data show. The sales increase helped drop the supply of existing homes to 10.4 months in August from 10.9 months in July.

Need more evidence of affordability? Oil is below $80/barrel and gasoline is fast approaching $3/gallon, meaning we could see retail sales rise in coming months, helping to further stimulate economic activity.