Upside down, you're turning me, inside out, round and round
The year started on a negative note as stock prices tumbled on Tuesday, the first trading day of 2001. Market sentiment turned around 180 degrees on Wednesday when the Fed surprised the markets by reducing the federal funds rate target by 50 basis points to 6 percent. Stock prices surged and the NASDAQ posted its largest gain ever. Given a bold and aggressive Fed, the economy couldn't fail and company earnings were bound to recover. By Friday, market sentiment took another turn when the employment report was not sufficiently weak to unequivocally portend another 50 basis point drop in the fed funds rate at the end of the month with the regularly scheduled FOMC meeting. It does seem odd that a relatively decent report would cause such consternation in the equity market. After all, it meant that the economy was not falling apart. But if the economy had exhibited more serious problems, the Fed would have eased more aggressively - and that would have been bullish for the markets! In addition to the less than desired employment report, market players were also reacting to (unsubstantiated rumors) about problems at a major money center bank and more warnings that fourth quarter earnings would be soggy. The year is off to a volatile start. Happy New (old) Year!

Relative to the NASDAQ composite index, the Dow Jones Industrials continue to hold up pretty well. Despite the spurt on Wednesday, equity markets still were down from last week's close on Friday. The S&P 500 fell less dramatically than the Russell 2000 this week.

Treasury yields seesaw on economic and equity data
The bond market rallied going into the New Year. The weak economic data coupled with a bear equity market was clearly good news for bond prices. Contrary to popular belief that Fed ease is good for the bond market, bond prices tumbled on Wednesday when after the Fed announced its 50 basis point rate reduction. According to most bond experts, the drop in bond prices (and corresponding rise in yields) was due mainly because of profit taking. Market players had incorporated Fed ease into their prices. It's that old adage: buy the rumor, sell the fact. Bond prices increased moderately on Thursday and again on Friday. Indeed, by the end of the trading week, bond prices were once again near Tuesday highs. In fact, the short end of the curve (2-year and 5-year notes) saw even higher prices (and lower yields) on Friday than on Tuesday. As incoming economic reports determine the extent to which the Fed will ease in the next few months, bond prices are likely to continue their dramatic fluctuations.