The Markets

My closing comments last week in the "Markets" section of the Weekly Market Commentary, were, "This should be an interesting week to say the least." Well, the week did not disappoint. With that in mind, let me summarize what happened and how it affected the markets.

The Republicans took control of the house by a significant margin putting Ohioan John Boehner in the position of House Majority Leader. While the Democrats maintain control over the senate, their loss of six seats reduces their control dramatically.

Mid-week, the Fed announced the extent of their second round of quantitative easing (QE2). You'll recall from last week's WMC, I said the Fed is attempting to push down those stubbornly high, longer term interest rates to help spur economic activity. The tool they are using is called quantitative easing. It consists of the Fed purchasing Treasuries ($600 billion this time) thus reducing the supply of bonds available. If demand stays the same and supply is reduced, then bond prices rise. It's basic economics 101. The less supply, the higher the prices. The reason the Fed wants bond prices to rise is that bond yields fall when their prices go up. When yields are low, companies and investors look for other ways to invest and increase their yield. This, hopefully will spur economic activity.

On Friday, the final round of good news came out with the spurt in job growth that caught everyone by surprise. 151, 000 jobs were created in October with the majority of those positions in the service sector.

The good news didn't stop there; the government also revised August and September job losses by reporting that 11,000 fewer jobs were lost than originally thought.

All of this resulted in a very strong week for the markets. In fact, the current advance has now put us ahead of where we were in September, 2008. That was when the collapse of Lehman Brothers was announced and the credit markets ground to a halt. Many are saying that he fundamentals don't support these higher prices when you consider all the problems that still exist in the US and around the world. However, markets love to climb a wall or worry and that is exactly what seems to be happening. Someone once told me...expect more of the same until the market shows you something different.

Enjoy the gains while we can!