This is The Wall Street Digest Hotline Update for Tuesday, February 5, 2008, at 6:00 p.m. EST.
A sharp drop in the ISM Non-Manufacturing Index pushed stock prices sharply lower today. At the close, the Dow sank 370 points, closing at 12,265, while the Nasdaq fell 73 points, closing at 2,309. Oil closed $1.61 lower at $88.41 per barrel, and gold closed $19.10 lower at $890.30 an ounce.
The ISM Index plunged to a reading of 41.9 percent in January from 54.4 percent in December. It was the largest drop in the history of the index and signaled contraction in January. The sharp drop raised recession fears. Investors sold stocks and purchased bonds in a flight to quality. As a result, bond prices jumped, while interest rates fell. The 2-year Note yield fell to 1.94 percent, well below the Fed funds rate, now at 3 percent. The Fed funds are forecasting a 100 percent chance of a rate cut at the March 18th FOMC meeting.
I would continue to avoid both the entire real estate sector and the financial sectors, including the builders, banks of all sizes, brokerage companies, and insurance companies. Billions of junk collateralized debt obligations and collateralized mortgage obligations have not surfaced because no one wants to admit they were dumb enough to purchase them.
It is increasingly difficult to refinance commercial real estate, which will push prices of buildings and shopping centers down over the next two or three years. Residential real estate will not bottom in 2008. The downward slide has just begun for commercial real estate.
The S&P 500 is still undervalued by more than 50 percent, which means the S&P 500 Index could double and still be below fair value. After the market bottom, which I believe is near, stock prices should rise 22 to 25 percent over the next twelve months. The U.S. is still the engine for global growth.
Let's stay fully invested! The stock market has a long history of impressive gains during election years. The market is still oversold and undervalued. Most importantly, the Smart Money and the institutions have been purchasing U.S. stocks on every pullback. The Smart Money is never wrong.
The next Hotline Update will be on Friday, February 8, 2008, at 6:00 p.m. EST.