Stock markets orderly as prices head lower
The Federal Reserve announced a reduction in the federal funds rate target on Monday morning just before the opening of the stock market, which had been closed since the September 11 attack on the World Trade Center and Pentagon. According to some media pundits, the rate cut didn't appear to impact the market since stock prices still posted a hefty decline. But the Fed's support was duly noted and may have stemmed some of the day's drop.

Market volumes were quite strong this week as investors tried to make sense of the situation. Most financial advisors are telling their clients that they should stand pat and hold on to their portfolios - because they are investing for the long haul after all. Long-term investors should find that the companies they hold will be strong again in a three- to five-year time horizon.

According to anecdotal reports, a good chunk of the selling this week didn't necessarily come from individual investors, but the institutional market. A CNBC analyst suggested this shouldn't be surprising because fund managers are judged on their quarterly performance and don't have the luxury of taking the long-term view. Interesting point.

Several studies came out this week showing that major events which have hurt the market in the past (Cuban missile crisis, death of President Kennedy, etc.) were transitory. For the most part, stock prices came back within three to six months. Many dealers and investment strategists argue that we are very close to a market bottom.

Bond market fluctuations
The bond market rallied big time last week in its first two days of trading after the terrorist attack. The mood of the market has shifted a bit this week as bond investors take into account the implications of the current events. What worries bond investors? To some small extent they are worried that excessive Fed easing will cause inflationary pressures. This is not a major concern given that current inflation indicators remain subdued.

To a larger extent, Treasury market traders are worried that the supply of Treasuries will increase because a fiscal stimulus policy suggests a greater amount of government borrowing. The government has already announced an emergency loan package for the airline industry. The administration has indicated its interest in cutting taxes for consumers and businesses. There is no question that defense spending will increase over the next year as well.