A Week in the Rearview - week ending 11/14/08
In the headlines
A look at some of the market movers over the past week:
- China unveiled a $586 billion stimulus plan
- As losses increased at AIG, its bailout got bigger
- American Express converted to a bank holding company in hopes of accessing TARP funds
- Citigroup launched an aggressive mortgage modification program
- Talks continued on the possibility of bailing out the big three US automakers
- Hedge funds recorded another lousy month in October
- Economists have turned very bearish on the US economy
- Treasury Secretary Hank Paulson materially changed the way the TARP program will try to achieve its goal
- GE got some help from the FDIC
- Wal-Mart reported a strong quarter, but was cautious about the future
- The OECD cut its growth forecasts for 2009 again, now showing a contraction next year
- The Euro area officially fell into recession
- It’s unclear what can really be expected from the G-20 summit over the weekend
- It may be too late for GM by the time Barack Obama takes office
- Retail sales caused a fresh round of bearishness
Commentary
Investors weary from dizzying volatility were still without respite this week. Though a 1.3% drop on Monday could be considered calm in light of recent times, the gap between low and high was still nearly 5%. Monday was followed by four days all with 2%-plus moves, including a truly rattling day on Thursday where a loss of 4% from the open was followed by a massive rally that took the S&P up 11.5% from the nadir.
The 6% loss that the S&P index finished the week with was driven primarily by increased pessimism over the state of the US and global economy. Though it was a light week for economic reports, nearly all of the numbers reported were worse than expected, from initial unemployment claims to the big drop in retail sales. If there was any economic highlight it was the fact that preliminary consumer confidence readings for November came in above where the market had expected. Meanwhile, as earnings season grinds on the market has been met by one company after another projecting future earnings to be weak.
And the wildcard in the whole mess is the government. Now caught in a bit of a no-man’s-land between the lame duck Bush term and the upcoming Obama Presidency, there is clearly somewhat of a holding pattern feeling in a lot of the government’s actions. Top of mind in this category is the “to bailout or not to bailout” question that faces the government when it comes to the major US automakers. Less the fault of the Presidential overlap, the market also responded poorly to the Treasury’s decision this week to abandon its initial plan to use TARP money to buy troubled assets directly from banks.
Looking ahead
It continues to be tough to say what we have to look forward to next week aside from continued volatility. Monday will likely be dominated by reviews of what the G-20 conference over the weekend accomplished or failed to accomplish.
On the economic front PPI and CPI will be released during the week and both are going to show that price growth on both the producer and consumer side has slowed drastically, though this is less likely to be much encouragement at this point. Midweek we’ll see the minutes from the most recent Federal Reserve meeting, and there will likely be a focus on the implications of what was said at that point.
The earnings calendar remains heavy through next week, with Lowe’s and Target reporting Monday, Home Depot and Saks on Tuesday, BJ’s Wholesale and Ross Stores on Wednesday, Dell and Gap on Thursday, and HJ Heinz and JM Smucker rounding out the week on Friday. There’s no reason to think that the general tenor of the reports will be any different from what we’ve heard over the past few weeks. Current numbers are likely to be moderate to weak, and outlooks will be very much on the conservative side.
As I noted above (and have been mentioning for weeks now), the one assurance that we have in this market is volatility. The reason is simple — financial markets are made up of a combination of actual finance and a healthy dose of psychology. In the quiet times — those years when the economy is relatively stable and the markets don’t move a whole lot in one direction or the other — finance takes a much bigger role. In times of great excitement or great despair, psychology tends to take over. And this is what we’ve seen recently.
The big five and even ten percent swings in the market are simply not dictated by financial or economic fundamentals. Sure, the moves are happening because of changes in some fundamental factors, but they not moving based on those factors. That may seem like a small difference, but it’s important. The economic reports that we’re getting from day-to-day to not equate to fundamental changes of these magnitudes. Instead, what investors are doing is taking these current period changes and reacting based on the direction of these changes and the expectation that these changes will persist and get significantly worse.
The problem with this is that there’s really no way to know whether investors’ are right or wrong in these predictions. Six months ago investors obviously weren’t bearish enough. Are we still in that same situation today? Or have investors swung the other way and gotten too bearish now? A lot of it boils down to a guessing game.
Still, we can’t simply sit back and wait for an economic recovery to show itself before jumping back into the market. Just as investors are trying to anticipate the economic bottom, they will likewise try to anticipate the beginning of the recovery. By the time good economic numbers start coming out, the market will long since have started its recovery.
What’s an investor to do then? We believe the answer for most investors is to avoid playing this guessing game at all and not only keep your money invested, but continue to consistently invest new money. If you don’t need the money for at least the next five years you have the luxury to be able to wait for the recovery and in the meantime take advantage of beaten down stock prices. Unfortunately, we can’t predict the timing of a turnaround, but we can predict that a turn will come and we want you to be there for it.
