A Week in the Rearview – week ending 1/16/09
In the headlines
A look at some of the market movers over the past week:
- President Bush requested the second $350 billion of TARP funds
- German officials increased the country’s stimulus spending by another $66 billion
- Spain has opened its own probe into the Madoff scandal
- Morgan Stanley and Citigroup announced a joint venture combining the two companies’ brokerage units
- Federal Reserve Chairman Ben Bernanke emphasized the necessity of ensuring the stability of the US banking system
- Analysts raised concerns over London’s HSBC
- Yahoo! hired Carol Bartz as its new CEO, though the choice quickly came under scrutiny
- Deutsche Bank announced that it will post a large fourth quarter loss
- Standard & Poor’s reaffirmed the United States’ AAA rating, but said risks to the rating are rising
- ABC news polls show US consumer confidence at astounding lows
- Apple’s Steve Jobs announced that he would have to take a medical leave
- The Federal Reserve’s Beige Book underscored the economy’s struggles
- Retail sales dove 2.7% in December from the prior month
- House Democrats shared details of their proposed $825 billion stimulus package
- Bank of America received $20 billion of additional government money, along with a guarantee worth up to $118 billion more, while reporting its first loss since 1991
- Citigroup announced an $8 billion loss and revealed plans to split into two companies
- The European Central Bank cut its key rate by a half percentage point
- The producer price index and consumer price index both fell in December
- A salmonella outbreak has led to the recall of numerous peanut butter products, including 16 from Kellogg
Commentary
It was another rough ride for the markets this past week, and the S&P 500 index finished down 4.5%, the second straight week that the index lost 4% or more. So far this year, the S&P has lost 5.9% as economic data and earnings have disappointed.
The biggest, and most disappointing, news of the week came from the financial sector. Bank of America reported its first loss since 1991 as loan losses continued to balloon and it also sought more government funding as even more significant losses mounted at Merrill Lynch. Bank of America just recently finalized the purchase of Merrill, but seemed to be taken by surprise at the magnitude of the company’s losses. The government agreed to inject $20 billion into Bank of America, while pledging another $118 billion to backstop losses from some of the bank’s troubled assets.
Citigroup played an integral part in the week’s events as the former banking giant scrambled to make moves that would allow it to survive. Early in the week it announced a joint venture to combine its Smith Barney brokerage operations with those of Morgan Stanley, a move that added to Citigroup’s capital position. Later in the week the bank revealed a massive fourth quarter loss and discussed plans to split the company into two parts.
The financial sector wasn’t the only place to find negative company news during the week though. Earnings announcements so far this earnings season have been disappointing, and companies across industries continue pre-announcing results below expectations. Tiffany, NVIDIA, Motorola, and Genentech were among the companies pre-announcing poor results last week.
Economic news wasn’t any more comforting. The Fed’s Beige Book report summed up the overall economic malaise, but individual reports on retail sales, unemployment claims, industrial production, and consumer sentiment punctuated the dour state of the economy. If there was a highlight of the economic reports it was the numbers on the producer and consumer price indices. Though both indices fell in the broad measures — which include food and energy prices — core prices were flat to slightly up, which could allay some deflation concerns.
And in a week chock full of news, we can’t ignore the unveiling of the Democrats’ fiscal stimulus package. Clocking in at $825 billion, the price tag is above the $750 billion that some were expecting, though it falls short of the $1 trillion or more that others say may be necessary. While the stimulus isn’t expected to completely reverse the economy’s decline, the hope is that it will help alleviate further pressure and potentially bring back some of the country’s lost jobs.
Looking ahead
The coming week will be one shortened by both the Martin Luther King Jr. observance, as well as the Presidential inauguration. Though the markets will be open on the day of the latter, the events of the day will likely mean that it will be a quiet day on the trading floor. Economic releases will be particularly light with initial unemployment claims likely being the highlight of that schedule.
The US market closure on Monday means that few earnings releases are scheduled for that day, but the action ramps back up on Tuesday — inauguration or not. IBM, Johnson & Johnson, State Street, and TD Ameritrade will be the big releases on Tuesday, and Apple, Coach, eBay, and US Bancorp will follow on Wednesday. Thursday will be the marquee day of the week with a host of major reports coming from AMD, Bank of New York Mellon, BB&T, Comerica, Google, Lockheed Martin, Microsoft, Nokia, Southwest Airlines, SunTrust, Taiwan Semiconductor Manufacturing, and UnitedHealth. Friday will slow back down a bit, but will still see General Electric, Harley-Davidson, Schlumberger, and Xerox.
The ongoing struggles of the financial companies will likely continue to be a focus during the week, but earnings results will probably be the primary focus. Any optimistic expectations that investors had are likely gone at this point, but results far below what the market is expecting will still be painful for companies reporting next week.
Avid readers of financial news and commentary may have run across the concern of some that, should our current circumstances mirror those of the Great Depression, it could take 25 years to simply get back to market peak. While this was true of the Great Depression, it highlights the reason why we recommend that investors invest steadily over time, rather than trying to guess what the market is going to do next.
A market timer could have gotten excited and invested a huge amount right at the market’s peak. Those following our advice may have invested a small amount at the peak, but also were investing at lower levels prior to the peak, and are continuing to invest at lower levels since the peak. As long as we’re rehashing stock market performance during the Great Depression, we could also note that investments made at the trough of the market decline quadrupled in the five years that followed.
The bottom line is that we are not interested in minimizing the severity of the problems facing the economy — they are quite severe — rather, we want to make sure you’re investing in a way that will give you the best chance of achieving solid long-term gains by the time you retire.
