A Week in the Rearview – week ending 10/3/08
In the headlines
A look at some of the market movers over the past week:
- Early in the week the US House of Representatives voted down the proposed $700 billion bailout plan, sending the US markets plummeting
- The Senate quickly revised the bill and breathed new life into it, voting it through with a 74 to 25 tally
- The revised bill fared better with the US House passing through easily and getting quickly signed into effect by the President
- At the beginning of the week, Wachovia (NYSE: WB) agreed to sell its banking business and other key assets to Citigroup (NYSE: C)
- But at the end of the week, that deal came into question when Wells Fargo (NYSE: WFC) came on the scene
- Struggles in the UK led to the nationalization of major lender Bradford & Bingley
- Belgium’s Fortis became the largest European financial institution to be bailed out during the credit crisis when three countries agreed to inject $16.3 billion into it
- Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) announced a $3 billion investment in General Electric (NYSE: GE)
- US auto sales fell more than expected
- The SEC announced that the ban on short selling will end next Wednesday
- The Institute for Supply Management’s reading on manufacturing in the US came in well under expectations
- Initial jobless claims spiked, partly as a result of the recent hurricanes
- Job losses continue to pour in as the unemployment rate clocked in at 6.1%
Commentary
We still have yet to get a reprieve from the extreme volatility on the markets and I’m quickly running out of superlatives. The S&P 500 index lost 9.4% on the week, the worst performance over five trading days since back in 2002, and the worst weekly performance since the week following the September 11th tragedy in 2001. And as for the 8.8% loss that kicked off the week, well we have to go back to April of 2000 to find another single day loss of over 5%, and we have to revisit October 19, 1987, when the market plunged 20.5%, to find a single day loss that exceeds Monday’s.
As I covered last week, all of the market’s eyes were squarely on the US House of Representatives and the Treasury’s $700 billion bailout plan. Though the prospects of the bill being passed looked good on Sunday night, when Monday’s vote rolled around the votes weren’t there and the bill was defeated, sending the market into a swoon.
The following day, the market rallied more than 5% on hopes that a revised bill would be passed. Sure enough, the Senate grafted the bailout bill onto an existing tax bill and, on Wednesday, voted it through by a 74 to 25 margin. The bill then headed back to the House of Representatives where it was solidly voted through, and the President subsequently signed it into law. Early reports suggest that Treasury Secretary Henry Paulson is already getting to work implementing the plan.
Unfortunately, by the time the bailout bill was signed into law, the market had become preoccupied with fresh economic news that showed an ailing US economy. Employment numbers that were released towards the end of the week sparked this new round of pessimism and sent the market down 4% on Thursday and another 1.4% on Friday.
Though we’ve become accustomed to hearing a lot about oil prices, they’ve been on the decline lately and have taken a back seat to the broader economy and news about the bailout. November crude contracts closed below $94 on Friday, well down from the peak earlier in the summer.
Looking ahead
My expectation is that heading into next week we’re going to continue to hear a lot about the bailout bill, its implementation, and the potential for it to have an impact. It’s unclear exactly how soon we should expect real news from the bailout team, but there’s no doubt that the journalists and pundits will have plenty to say.
Economic news next week is somewhat light. The first report of the week — the minutes from the Federal Reserve’s most recent meeting — could be one of the most notable, though when it comes to the Fed, most market watchers are more focused on whether recent events make an upcoming rate cut more likely. Later in the week there will likely be a lot of eyes on the weekly unemployment claims report after the big disappointment there this past week.
More important, though, will be the kickoff of third quarter earnings season, which will happen Tuesday when Alcoa (NYSE: AA) announces its earnings. In addition to Alcoa, we’ll see reports from Costco (Nasdaq: COST), General Electric (NYSE: GE), and Chevron (NYSE: CVX) next week. This is also the time when companies that will miss earnings tend to preannounce the shortfall, so expect the market to react sharply to these announcements.
But let me take a step back here, because at this point there are likely many of you that are far less worried about the earnings of any one company than you are about whether it’s still advisable to be investing in the stock market at all. We have — and continue to — recommend a strategy of continually and steadily investing in a diversified collection of funds. There is no way for us to say that the 9.4% loss last week was not extraordinarily painful — we have retirement savings of our own and they took the same hit. However, we continue to believe in the strategy that we keep plugging week after week.
Let me put this all in some perspective. Over the past 50 years on the S&P index, the only single day of trading that cost investors more on a percentage basis than this past Monday, was that Black Monday back in October of 1987. Investors that had the wherewithal to invest in the S&P the day of that massive drop stood to make 84% — or 13% per year — over the next five years. Over the next ten years they would have pocketed a 325% gain, an average of nearly 16% per year. What’s even more impactful, though, is if we look at the results from those investors that invested the day before the big drop. Though at the time those investors may have viewed their timing as absolutely catastrophic, those investors would have seen their investment gain 46% — or almost 8% per year — over the next five years, and 238% — or roughly 13% per year — over the next decade.
Unfortunately we don’t have the vision into the future to be able to say exactly what will happen over the next few years to move the market forward. However, if we can use history as any sort of guide, we like the potential for the market to continue to reward investors over the long term.
