Does Bear Stearns Bailout Mean No Bear Market?

The Federal Reserve's emergency weekend rescue of Bear Stearns may signal that the stock market has bottomed, thus avoiding the 20% decline that defines a true bear market. The rescue, coupled with the use of the discount window, and underwriting of JP Morgan Chase and other banks, assures failing financial institutions that the Fed will take on their bad debt, which allows them to keep lending. (Source: Guardian, Bottoming Process Begins with Bear, not Bear Stearns, March 20, 2008)

The Fed has taken many steps to assure the financial markets of its support. The FOMC lowered the discount rate .75 points to 2.5%, and dramatically lowered the Fed Funds rate .75 points to 2.25%. The Fed hasn't lowered rates so dramatically in 20 years. In addition, the Fed promised banks it will take on $200 billion worth of subprime debt in a loan program that starts this month.

The Guardian quotes several analysts, who state that this capitulation of Bear Stearns, the 5th largest investment bank on Wall Street, is similar to the capitulation of Enron and Long-Term Capital Management in previous market downturns. They also sense that investors are now backing away from gold and oil futures, and that these investments have seen their peaks. This week, oil futures for April delivery fell nearly $5 to $104.48 a barrel, while gold dropped 6% to a three-week low to $940.40 an ounce.

What It Means to You

Even if the fear has, indeed, been driven out of the stock market with the Bear Stearns debacle, there could still be some volatility with stock prices. However, gold and oil prices will not reach their previous highs again, and the Dow will not breach Monday's low of 11,757 again. Furthermore, adjustable rate mortgages should become cheaper than fixed rate mortgages again. (See Why Are Ajustable Rate Mortgages Higher than Fixed Rates?) This doesn't mean that extremely slow economic growth won't continue. It just means that it won't get a whole lot worse before it gets a little better.

Related Reading

• A Primer on Current Federal Reserve Interest Rates
• Fed Lowers Discount Rate...What Does It Mean?
• Historical Fed Funds Rate
• A Primer on the Subprime Mortgage Crisis
• 2007 Banking Liquidity Crisis
• With Oil and Gas Prices at 1970's Levels - Where Are the Gas Lines?