Stock market searching for a bottom
The warning season is not being particularly kind to the stock market. Prices recuperated somewhat at the end of the week from the drop recorded in the first half of the week. The Nasdaq composite index fell below the psychologically important 2000 level for two straight days. Right now, only the Russell 2000 index of small capitalization stocks is above yearend levels, although on a weekly basis, it performed worse than the other major indices this week. Unfortunately, economic reports don't suggest that corporate profits will be looking better any time soon. Another federal funds rate cut could benefit stocks marginally, but at this point, equity investors would rather see an improvement in economic activity so that corporate profits will grow.

Treasuries rally on upcoming rate cut expectations
Over the past month or so, bond investors were beginning to worry that an overly accommodative Fed could lead to inflationary pressures. However, investors were reassured that inflation was not becoming a problem with the release of the CPI and PPI figures at mid-month. Given the sluggish economic news coupled with warnings of poor earnings from many companies, bond prices this past week generally traded higher (yields falling). Bond investors are expecting the Fed to reduce its federal funds rate target by at least 25 basis points bringing it to 3.75 percent, its lowest level in seven years. But a debate is raging in the bond market whether the Fed will go ahead and actually cut rates by 50 basis points as they have already done five times this year.