A Week in the Rearview - week ending 10/24/08
In the headlines
A look at some of the market movers over the past week:
- South Korea announced that it is launching a bailout program of its own
- ING received a $13.4 billion lifeline from the Netherlands government
- President Bush announced a series of global economic summits to address the current economic slowdown
- The Federal Reserve launched a new plan to help stabilize money market funds
- Fed chief Ben Bernanke spoke out in favor of a fiscal stimulus package
- Asian countries considered a massive program to shore up the region’s economic situation
- Apple managed to report good numbers despite the difficult economic environment
- Yahoo! announced big layoffs along with their quarterly report
- Consumer sentiment continues to be underwhelming
- Credit Suisse announced a big third quarter loss
- Goldman Sachs announced that it will cut 10% of its staff
- Foreclosures are still dangerously high but may be showing signs of slowing
- OPEC countries agreed to cut production in an effort to support the fast-falling price of oil
- Former Fed Chairman Alan Greenspan testified before Congress on his part in the financial crisis
Commentary
The market stats for the week were all too familiar for investors. Three out of the five days were down days, four out of the five days had moves of 3% or greater, and the week finished down just shy of 7%.
News-wise, coverage focused on the worldwide economic uncertainty. Though financial markets appeared to loosen up to some extent sparking a big gain on Monday, economic reports throughout the week — including a decline in third quarter GDP in the UK — were sobering. Earnings reports throughout the week were mixed, though even positive reports were overlooked by investors as they continued to focus further into the future.
At this point it is unclear exactly where the market is taking its direction from. Down more than 40% from a year ago, it would seem that even a significant recession has already been priced in. Reports have been making rounds that significant liquidation selling from troubled hedge funds has put downward pressure on markets, while even healthy hedge funds and mutual funds may be selling in anticipation of investor redemptions. At the same time, individual investors, worn down from the market’s wild volatility, may finally be throwing in the towel and selling.
Looking ahead
Last week I began this section by saying:
The more volatile and emotion-driven the markets become, the more difficult it is to predict what factors will play significant factors in its movements. That said, the news events that will cause the most commotion on the markets next week will likely be those that are unscheduled such as new information on the bailout progress.
It’s hard to come up with something more applicable this week. Volatility has continued and we’re somewhat at the mercy of a spooked market right now. Investors will continue to process economic data to try and figure out just how bad the economic downturn will be.
That said, at a time like this it’s important to keep in mind that the stock market and the economy do not typically move coincidently. Economic readouts give us a picture of current and recently passed activity levels. The stock market, meanwhile, tries to anticipate economic activity in advance. This means that stock market declines will precede the bottoms of economic declines and stock market recoveries will likewise precede economic recoveries. So even if the economic picture gets worse from where it currently stands today, that does not necessarily mean that stock market will.
Going into next week we have a heavy calendar on both the earnings and economic fronts. There are a handful of economic reports that could significantly impact the markets. On Monday and Tuesday we’ll see September new home sales and October consumer confidence, respectively, and both are expected to show declines from the prior month. On Friday we’ll see personal income, personal spending, and another reading on consumer sentiment.
The two highlights of the economic calendar, however, will take place right smack in the middle of the week. On Tuesday, the Federal Reserve will make its October policy statement. Based on implied probabilities calculated by the Federal Reserve Bank of Cleveland, the expectation is that the Fed will cut rates by anywhere from a quarter point to three quarters of a point. The following day, an advanced reading on third quarter GDP will be released. After a jump of 2.8% (annualized) that was driven by government stimulus payments in the second quarter, the briefing forecast is for an annual rate of 0.3%, while the market is expecting a decline of 0.5%.
Week after week we will continue to bring you a weekly recap and a look ahead to the next week. However, it’s important that our weekly coverage of news and events is not translated as a short term focus from an investing perspective. We continue to be firmly focused on the long term when it comes to investing, and while the current period is certainly trying, we expect that investors holding their investments, and continuing to invest, over the next five to ten years will benefit handily from the eventual market recovery.
