Last week U.S. stocks posted their biggest weekly gain since March after Federal Reserve officials including Chairman Ben Bernanke signaled more interest rate cuts may be on the way. There's a growing consensus that Fed policy makers might cut the benchmark lending rate by as much as 0.5 point, rather than the widely expected 0.25 point, when they meet again on December 11.
Speculation of the cut comes from recent evidence that there are still many defaults to come in the ongoing credit crisis -- and that creditors are in need of further bailing out. I think it's likely that the Fed will cut rates and, given our current holdings and the state of the market, I'm all for it. A 0.5-point cut in the Fed Funds Rate would cause a jump in U.S. stocks and further pressure the U.S. dollar against other major currencies, both of which will boost our stocks higher.
A number of leading financial institutions, including my former employer Goldman Sachs, are predicting more rate cuts in the next six months, perhaps lowering the Fed Funds rate from 4.5% to 3.0% by summer of 2008. I'm not sure whether more rate cuts will be able to bail out the housing and financial sectors, but I'm almost certain that a 1.5-point rate cut will cause the U.S. dollar to fall sharply against Asian currencies and lead to sharply higher commodity prices like $100 oil and $1,000 gold. These developments would be positive for our portfolio because, as you know, our holdings are backed by Asian-denominated assets and many of them benefit from higher commodity prices.
Our Asia Edge portfolio performed strongly last week, gaining an impressive 9.6% while the S&P 500 was up 2.8% and the NASDAQ jumped 2.5%. One-third (five out of a total of 15) of our stocks made double-digit gains. Think these gains is impressive and want to enjoy the profits, too? Click here to join Asia Edge today! Even after last week's advance, however, November was the worst month for the S&P 500 Index in five years.
Asian stocks also climbed last week, trimming the regional benchmark's biggest monthly decline in one-and-a-half years. The MSCI Asia Pacific Index added 4.9% to 161.92 last week, snapping a three-week, 8.4% slump. The index dropped 5.5% in November, its worst month since May 2006. Japan's Nikkei 225 Stock Average gained 5.3%. The Hang Seng Index jumped 7.9% -- the region's biggest advance -- due to speculation that Hong Kong's borrowing costs will be lowered.
Although I continue to expect a rally through year-end, I'm still cautious for the long-term. Unless the U.S. financial sector improves in the next six months, it will be tough for the U.S. market to regain upward momentum. If U.S. stocks weaken, it will weigh on stock markets throughout the rest of the world.
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