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:
- Morgan Stanley had to use $23 billion to help prop up its money market funds
- Talks between GM and Chrysler continue as the US auto makers struggle
- BP announced a better than expected third quarter
- Whirlpool announced 5,000 layoffs as the global economy continues to slow down
- GM’s GMAC is looking into becoming a bank holding company to be able to access Treasury bailout funds
- Consumer confidence plunged to an all-time low this month
- The Federal Reserve cut the Fed Funds Rate 50 basis points to 1%
- Japan announced an economic stimulus plan and cut interest rates
- Sprint decided to keep its Nextel unit after failing to find a buyer
- GDP fell in the third quarter, but not as much as expected
- Crude oil had its worst month in October since futures began trading 25 years ago
Commentary
October finished on a good note with stocks shooting up over 10% for the week. However, that’s about all the good we can say about this past month. While a 10% weekly gain might normally be a heady week, after the month we’ve had it’s only part way to climbing back out of a deep hole. In the end, the S&P 500 index shed 17% in October.
The data out this week focused on two economic releases — the Federal Reserve’s interest rate decision on Wednesday, and the third quarter GDP reading on Thursday. In typical market anticipation, all three indices had a major rally on Tuesday ahead of the Fed’s decision, with the S&P finishing up nearly 11% on the day. When the decision to cut rates by a half percent came out on Wednesday, the S&P backed off some of the gains of the previous day.
GDP, meanwhile, is an interesting story. Prior to the release, the briefing forecast was a positive 0.3% annualized rate of growth, while the market was expecting a negative 0.5%. And this was coming off a slower-than-normal but better-than-bad second quarter in which the government’s stimulus checks helped push annualized growth to 2.8%.
The negative 0.3% rate that was released seemed to comfort the market. This may seem strange because it shows contraction and means that we will end up entering a “true” recession if next quarter’s number is negative as well. However, with the markets down heavily from the highs of last October, there is already a good deal of pessimism priced in. What market participants are looking for now are signs that things aren’t going to end up in a worst case scenario — and the GDP release seemed to be that.
Most other economic indicators released throughout the weak also showed a slowing economy, including a much worse than expected reading of consumer confidence by The Conference Board. One of the few upside surprises was better than expected growth in personal income.
Meanwhile, earnings season continued to chug along, delivering some surprises, but largely falling within the bounds of expectations. Earnings at most companies don’t seem to be falling alarmingly quickly, but the forecasts delivered by most management teams warn of slowness continuing next quarter and potentially through much of next year.
Looking ahead
October is a strange month. For whatever reason, the worst declines in the history of the stock market have taken place during this month. The steep decline that kicked off the market’s plunge in to the Great Depression was in October. As was the dive of 1987. And surely October 2008 will go down in history with those two previous crashes. Maybe it’s haunted? After all, the month does conclude with Halloween.
Of course, saying that we can breathe a sigh of relief just because we’re now out of the month is about as plausible as saying that October is a haunted month. Yet that’s what many commentators seem to want to believe. If you haven’t heard this already, let me be the first to tell you: if we start to see a rebound in November, it’s not because the changeover from October from November is magical, it’s simply because pundits and traders have convinced themselves that November will bring some type of recovery.
There’s no magic in the markets, there’s psychology in the markets. Anytime something is talked about enough, investors, traders, and so forth can convince themselves that it is so. And it doesn’t take a Nobel laureate to figure out that when enough participants are convinced of something, it’ll end up being a self fulfilling prophecy.
But we steer clear of all of that, and that’s where our advantage is. By avoiding taking action based on who wins the Super Bowl (don’t laugh, some people actually do that), the shape of a graph, or the phase of the moon, and instead consistently investing in a diversified portfolio of funds and holding onto them over the long term, we’ll capture the long term appreciation of commerce around the world with far less hair lost in the process.
