A Week in the Rearview – week ending 11/07/08
In the headlines
A look at some of the market movers over the past week:
- Barack Obama was elected the 44th President of the United States
- Drivers are keeping more in their wallets as gasoline prices continue to fall
- Machinists at Boeing agreed to a 15% raise and returned to work
- JPMorgan is making a huge push to modify $70 billion worth of mortgages
- Despite a rock bottom Federal Funds Rate, mortgage rates are on the rise
- A flagship Goldman Sachs hedge fund has lost nearly $1 billion amidst the market downturn
- Auto sales in October were downright ugly
- Stocks fell hard in a post-election sell-off
- The Bank of England cut rates by a hefty 1.5%
- Forecasted sales declines at Cisco sent investors running
- Analysts’ are heavily cutting back fourth quarter and 2009 earnings estimates
- Reports from the service sector showed worse than expected drop
- Owners of GMAC debt could be out of luck if the auto lender doesn’t turn itself around
- Wells Fargo encouraged investors when it completed an $11 billion sale of new stock to help pay for its Wachovia acquisition
- Though Yahoo! has come back to the table Microsoft does not seem interested in a renewed bid for the search company
- US unemployment climbed to 6.5%
Commentary
While it was a memorable week historically, if not politically, for the United States of America, it was a forgettable week when it came to equity markets.
The election of Barack Obama as the US’ 44th President made him the first African American President, and, to many at home and around the world, signaled a change in direction for the country. However, an historic election day stock market rally that added 4.1% to the S&P 500 was erased by a two-day, post-election plunge of 10%. The S&P index lost nearly 4% on the week, and with the exception of Monday, every day showed a large, volatile swing.
While some may have been cheered by the changing of the guard at the top post in the US, many others continued to focus on the very real near term challenges. Economic reports during the week were pessimistic on the whole, particularly when it came to unemployment numbers. The market continues to seem very unsure of what, if anything, can be done to abate the economic downturn, as well as what timeframe a recovery might come in.
Meanwhile, earnings reports from companies across industries have been mixed on the whole, but the outlooks have been anything but. Whether they’re looking at real data or being extra cautious, management teams have been particularly bleak in their forecasts for the remainder of 2008 and next year. Many investors also still fear that analysts’ earnings estimates for the next three to five quarters remain on the optimistic side.
Looking ahead
If November was supposed to bring an automatic stock market recovery, we haven’t seen it yet. Looking forward to next week it’s hard to know what to expect — aside from continued volatility. The economic calendar will be light, with retail sales numbers and a preliminary reading on the Michigan Consumer Sentiment Index for November coming at the end of the week. A more likely market mover for the next week will be developments in the response of governments around the world to the continuing financial turmoil.
The earnings calendar remains robust next week before starting to taper off somewhat the following week. Retail names will be among the major groups reporting numbers during the week, and pessimism from the CEOs of that group could incite more selling among investors that already fear further slowing in consumer spending.
We understand that our continued beating of the “invest consistently” and “don’t get scared off by the market” drums may seem overly repetitive. However, we believe that it remains just as true today as every past mention. Why is that? When it comes to capturing the returns that equities have historically offered, we have yet to find a system that consistently works for timing the movements of the market. Investing consistently over varying market conditions, on the other hand, has been time tested and battle proven.
Over the past two months, there have been eight days where the market has gained 4% or more in a single day. There have been two days where the market has jumped more than 10% in a single day. Let me repeat that: more than 10% in a single day. When a recovery does come, we expect that it will start in an unpredictable, volatile, and abrupt fashion. Those who have chosen to move to the sidelines to wait for the market to prove it has started into a recovery may miss a very significant part of that recovery. Worse still, sidelined investors may try to jump back in at the wrong times — reentering after a big gain only to get burned by a swing back down and scared out all over again.
So instead of trying to do the impossible — guessing market movements — we choose to stick to what has been proven over time, namely, the long term appreciation of the stock market. This doesn’t mean that the current market crash doesn’t hurt — it most certainly does. But the golden phrase that King Solomon’s wise men told him to engrave on a ring, “this too shall pass,” is no less true today than it was back then.
