9/14/18 – Stocks Rebound on Trade News

Stocks rebounded this week as rumors of improved trade talks with China. Trade continues to be a market moving topic, with news of trade deals pushing stocks higher while talk of tariffs tends to pull them lower. For the week, the Dow gained 0.9% while the S&P 500 increased 1.2%.

Tomorrow marks the 10-year anniversary of the Lehman Brothers bankruptcy that many cite as the start of the Financial Crisis. Lehman Brothers failed on September 15, 2008 and that bankruptcy sent the Dow down 4.4%, its worst daily performance since September 11th. The Lehman bankruptcy had been months in the making as the value of its mortgage securities continued to decline. The bank had significant debt and used a lot of overnight funding. As the crisis unfolded, Lehman lost the ability to borrow in the short-term market. That coupled with its then-current state of insolvency forced the company into bankruptcy. Of all the firms that failed during 2008, Lehman was the only one that was pushed into bankruptcy. Bear Stearns, Washington Mutual, Wachovia and others were sold to stronger banks. While investors in all the failed companies suffered large losses, Lehman shareholders faced a complete loss.

Today, we see banks with significantly lower debt levels relative to Lehman as well as less dependency on short-term debt markets for liquidity. The financial sector is stronger today than we saw through most of the early 2000’s and increased capital requirements provide more cushion for banks to absorb losses. Bank regulation is a fine line between requiring too much capital, which limits lending and economic activity and too little capital which can cause a bank failure with small declines in asset values.  Read More 

Oil increased this week, gaining 1.8% to close at $68.98/barrel. The yield on the 10-yr Treasury moved higher, closing at 3.00% from 2.94% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.60%, from 4.54% last week.

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