Profit-taking
The major equity indexes generally ended the week on a positive note. However, not all indicators were higher this week relative to last Friday.
The Dow Jones Industrials as well as the S&P 500 both declined relative to a week ago, as did the Wilshire 5000. But tech stocks improved this
week with the Nasdaq composite index posting a moderate gain. The Russell 2000 also rose this past week benefiting from an early "January-
effect" when money returns to the market, often into small cap stocks. The Russell 2000 index now stands at its highest level since August 31.
Calm before the storm?
Bond investors finally started looking at current economic news and are realizing that conditions aren't all that rosy yet. Fed governor Laurence
Meyer and San Francisco Fed president Robert Parry both suggested that the Fed has more room to lower interest rates even though current
nominal levels are low by historical standards. Both said the real rate was more important than the nominal rate. The PCE deflator was negative
in the third quarter due to the way the government priced insurance to reflect the September 11 tragedy. But there is no question that the inflation
rate is lower than the current federal funds target of 2 percent. If the Fed wanted to get to a zero real rate, it certainly could lower the federal
funds rate target to 1 percent. That means the Fed still has ammunition in its arsenal to spur economic activity. The reassurance from the Fed
officials this week allowed short term yields to retrace at least some of the previous weeks' gains.
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Markets at a Glance Recap of US Markets The Economy The Bottom Line Looking Ahead
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