Fed’s Move Spurred Market Shakeup

10/22/2007 12:00 am EST

Focus: MARKETS

Ron Rowland

Editor, All Star Fund Trader

Ron Rowland, editor of All-Star Fund Trader, says the Federal Reserve's rate cut last month sparked advances in certain groups of funds and ETFs.

The Federal Reserve's decision on September 18th to cut short-term interest rates by 50 basis points proved to be just what the doctor ordered for stock market benchmarks. Major indices moved up in the last half of the month to challenge their July high points [before falling back in subsequent weeks-Editor].

Yet not everyone was convinced; the rate cuts sparked a furious sell-off in the dollar and drove long-term bond yields much higher as it became clear the Fed was willing to risk inflation in order to bail out homeowners and mortgage lenders. Traders appear to expect more rate cuts in the coming months, so the final quarter of 2007 could bring more volatility.

The technology-heavy NASDAQ 100 Index was the leading equity benchmark in September, [and] generally, large-cap stocks outperformed small-caps and growth outperformed value. Hence, large-cap growth was the best corner of the style box while small-cap value was the worst. Energy and materials were the top sectors while financials and consumer discretionary were the laggards

With the Fed seemingly under the impression that inflation is not a serious problem, commodity prices climbed in September. Crude oil futures [continue to set new highs]. The iPath S&P GSCI Crude Oil Total Return ETN (NYSE: OIL), which tracks the crude oil price, jumped +12.6% for the month. Energy sector funds had smaller but still-impressive gains.

The same forces that drove energy higher were beneficial for gold and other commodities. iShares Comex Gold Trust (AMEX: IAU) gained +10.5% for the month. Meanwhile, Fidelity Select Gold (FSAGX) jumped an astonishing +24.6% in September.

At the same time, high-yield bonds jumped in response to the re-liquification of the credit markets. iShares iBoxx High Yield Corporate Bond Fund (AMEX: HYG) gained 2.9% for the month. For similar reasons, the dollar plunged against higher yielding currencies, to the benefit of currency ETFs. CurrencyShares Australian Dollar Trust (NYSE: FXA) led the way higher with a 9% gain.

The falling dollar provided a further boost to international funds that were already outperforming the US. China funds accelerated their up trend as some pundits said China is in a "bubble." This may be so, but bubbles can get much bigger than most people think before they pop. Other emerging markets shot higher as well, including Brazil, Russia, India, and a host of smaller markets.

Japan continued to lag behind the rest of the developed world. Commodity-intensive economies like Australia and Canada gained ground as resource prices climbed. Strength in the euro pushed Europe-focused funds higher in dollar terms, with Germany showing particularly attractive momentum.

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