A Week in the Rearview - week ending 2/29/2008
In the headlines
A look at some of the market movers over the past week:
- Former Fed Chairman Alan Greenspan said that a US recovery may take longer than usual while booming oil prices may go on indefinitely
- The National Association for Business Economics didn’t have a much better outlook, but most still think the US will avoid recession
- Tough market or not, Visa is still planning to move forward with a potentially record-breaking IPO
- Ratings agency S&P revealed that a ratings downgrade on MBIA (NYSE: MBI) and Ambac (NYSE: ABK) isn’t as imminent as many expected
- The fall in US home resales in January was markedly better than what forecasters were expecting
- Take-Two Interactive (Nasdaq: TTWO) found itself battling off a hostile bit from video game giant Electronic Arts (Nasdaq: ERTS)
- Investors took some comfort in IBM’s (NYSE: IBM) forecast and $15 billion stock repurchase
- A handful of economic data points all came in the wrong way
- Pilot seniority has put the chances of a Delta (NYSE: DAL) / Northwest (NYSE: NWA) merger on the rocks
- The OFHEO lifted the portfolio growth cap on mortgage financers Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE)
- Fed Chairman Ben Bernanke signaled that the Fed is ready to continue cutting interest rates, and this as economic data continues to come in on the downside
- GDP growth slowed considerably in the fourth quarter
- Computer giant Dell (NYSE: DELL) disappointed with its fourth quarter earnings
- Things just keep getting worse for insurer AIG (NYSE: AIG)
- Distressed investor Wilbur Ross announced a major stake in Assured Guaranty (NYSE: AGO), a bond insurer that hasn’t been in trouble lately
Commentary
The week started out on the upside with two straight days that put the S&P up over 2%. Continued concerns over the economy, inflation, and the financial services sector crept back into the picture towards midweek and drained the week’s early gains by week end.
Commentary from most economists continues to be relatively pessimistic. Though a majority of economists seem to still believe that a true recession will be avoided by the US, it is somewhat a question of semantics. A recession in technical terms is two straight quarters of negative economic growth, so consecutive quarters of -0.1% growth would be considered a recession, while back-to-back quarters of no growth would not. Regardless of whether we will apply “the r word” in retrospect, that the US is facing a major slowdown seems a sure thing.
With that in mind, the week played out similarly to many of the weeks preceding it — reactions to one-off news events, forecasts, and economic data releases tugged at the market in both directions. Sentiment during the week was split. During the first half of the week investors seemed to be considering whether stocks had sold off beyond what was needed, while economic data releases and comments from Chairman Bernanke had them revisiting pessimism in the second half.
Looking ahead
It’s important to note that recession is just a word, and the difference between the US economy actually heading into a recession and slightly avoiding it can be small. For that reason, it’s important to look beyond the coverage of whether or not what we’re experiencing is a recession — it’s just not that important.
From the standpoint of US investments, the important thing is whether the current problems will cause lasting damage to the functioning of the US financial systems or impair the country’s future growth prospects. There is an argument that the severity of the housing turndown and the erosion of credit confidence will have lasting impact. However, most economists believe that we are simply experiencing an economic cycle that will resolve itself within the next few quarters. There is likewise an argument for the current problems in the financial system leading to changes that will strengthen it in the long term.
As we’ve stressed in the past, for the vast majority of long-term investors saving for retirement, reacting to the short term fluctuations of the market can be difficult, if not detrimental. Investors that plan to hold their investments for at least five years and are properly diversified across asset classes will find the best results from investing on a consistent schedule. This will allow them to sleep better during up markets and down markets, while at the same time letting them capture long term gains.
