A Week in the Rearview – week ending 1/09/09
In the headlines
A look at some of the market movers over the past week:
- US auto sales provided plenty to be disappointed about
- Toyota announced that it will suspend production for 11 days in February and March
- The US Federal Reserve began purchasing mortgage backed securities
- Indian outsourcing giant Satyam crumbled after management admitted to fraud
- Minutes from the most recent Federal Reserve meeting show members bracing for a long slowdown
- Alcoa announced big job cuts to cope with the tough environment
- Russia and Ukraine locked horns over energy prices
- Computer giant Lenovo projected a loss for its quarter and announced job cuts
- Time Warner and Intel both issued profit warnings
- Citigroup dropped its opposition to a Senate bill allowing “cramdowns”
- President-elect Obama stressed the importance of a major stimulus package
- Obama’s economic advisors revised up the number of jobs that could be created under his stimulus proposal
- The unemployment rate went over 7% in December
Commentary
Though many commentators were billing this week as the true start to 2009, we can only hope that the rest of the year brings better news. The S&P 500 index finished the week with a 4.4% loss, owing to drops on Wednesday and Friday, primarily stemming from employment concerns.
On Wednesday, the ADP payroll report showed employers slashing 693,000 jobs in December. That was followed up by the government’s unemployment numbers later in the week, which showed unemployment climbing to 7.2% in December from 6.8% the prior month. The reported work week for December also fell, underscoring the fact that employers are buckling down. Other economic reports such as construction spending and the ISM service sector report came in above expectations, but still showed contractions.
The earnings calendar was light for the week, however several companies issued profit warnings. Among the list of companies cutting forecasts were Intel, Alcoa, Time Warner, Wal-Mart, and Gap.
Oil, meanwhile, continued to be highly volatile as tensions in the Middle East, Russia’s dispute with Ukraine, and economic concerns whipsawed prices during the week.
Looking ahead
Just as last week’s economic calendar was focused on employment, the coming week’s calendar will revolve around prices. Wednesday we will see export and import prices which will be followed by producer prices on Thursday and then consumer prices on Friday. Pricing concerns have shifted from inflation to deflation as the recession has deepened and the current projection is that consumer prices fell 1% in December while producer prices dropped 1.7%. Off the pricing beat, retail sales numbers will be reported on Wednesday.
The bigger story for next week, however, will be the launch of the fourth quarter 2008 earnings season. Alcoa, which already preannounced softer than expected earnings, kicks off the earnings season after the market’s close on Monday. The pace of earnings announcements won’t ramp up until the following week, but we will see a few major announcements next week including Genentech, Intel, and India’s HDFC Bank.
2008 brought us a year that was full of historic events and surprises. Oil broke over $100 per barrel and charged up to nearly $150 per barrel before plunging back down into the 40s. Bear Stearns and Merrill Lynch ceased to be standalone companies while Lehman Brothers was forced to file chapter 11 bankruptcy and Goldman Sachs and Morgan Stanley became bank holding companies. The Federal Reserve was forced to take unprecedented action, while the US Congress approved a $700 billion financial bailout program to aid ailing credit markets. And, of course, the S&P 500 index plunged nearly 40%.
The recently ushered in new year promises to keep investors on their toes. As the recession that began in late 2007 continues to stretch on, it threatens to become the longest US recession since the Great Depression. At the same time the history-making President-elect stands to kick off his Presidency with a massive fiscal stimulus program that, when all is said and done, could reach over $1 trillion. And this is just what we know a week into the new year!
There’s something else we know too. We know that as severe as this recession may be, it will at some point give way to a new cyclical economic expansion. We also know that the stock market does not move in synch with the economy and will undoubtedly recover before the economic reports do. This knowledge is crucial because it gives us the confidence we need to continue investing in this market and take advantage of the low prices.
2009 may bring some lumps of its own, but we are confident that investors will reap the best results by letting the long-term average returns of the market work for them rather than by trying to outguess the market’s short term movements.
