A Week in the Rearview – week ending 1/30/09
In the headlines
A look at some of the market movers over the past week:
- Drug giant Pfizer agreed to acquire competitor Wyeth for $68 billion
- ING announced that it will post another loss and take money from the Dutch government
- Companies around the world continue to cut jobs
- Fannie Mae and Freddie Mac may need to tap further government cash
- American Express reported a tough quarter amid increasing loan losses
- Timothy Geithner was confirmed as the new Treasury Secretary
- Home sales posted a surprise jump in December, but prices continue to decline
- Former Merrill Lynch CEO John Thain came under heavy fire over Merrill’s bonus payouts
- Rumors swirled midweek that the Obama administration was preparing to unveil a “bad bank” to take up troubled assets
- Yahoo!’s quarter may not have been pretty, but it topped expectations and that was enough for investors
- Consumer confidence continues to scrape rock bottom
- The Fed’s statement surprised few
- The US stimulus package passed through the House, but did so without the support of the Republican party
- GDP in the last quarter of 2008 may have contracted at a 3.8% annual pace
Commentary
It was certainly an eventful week, but it seems that in the wild times we’re living in that we could say that every week. After a positive start to the week, investors lost their nerve in the back half and the S&P 500 index closed down 0.7% for the week. The weekly loss was the fourth straight and brought the January and year-to-date 2009 performance to -8.6%.
Earnings took center stage during the week, with major reports coming from across industries. In all, earnings were as expected — poor, with pessimistic outlooks for the rest of the year. Though there were some more positive reports interspersed, they weren’t enough to change investors’ minds about the near term direction of corporate profits, or for the need for overall profit estimates to be curtailed further.
Potentially worse for investors’ and consumers’ psyches, however, was the flood of layoffs announced. Major companies from a host of industries — including Caterpillar, Pfizer, and Home Depot — revealed tens of thousands of new job cuts.
If economic reports weren’t outright positive, they were at least mixed and provided an offset to some of the disappointing earnings reports. Most notable was the GDP announcement at the end of the week. The advanced GDP reading came in at an annualized 3.8% drop, far better than the projected 5.5% decline. Though a build in inventories contributed roughly 1.3% to fourth quarter GDP, the economy performed better than expected even after adjusting for that growth in inventory.
As has been the case in past weeks, the government’s measures to deal with the struggling economy also played a significant part during the week. The $819 billion stimulus plan passed through the House of Representatives, though it did so without any support from the House Republicans. The bill will now move on to the Senate where it will face a tough vote before getting to the President’s desk. Though the idea of creating a “bad bank” to take on trouble bank assets is still very much in the pre-planning stage, rumors that it could gain momentum helped fuel some early week optimism, though that cooled by the end of the week as near term action on any such plan began to seem unlikely. Tough talk from the President and other government officials over the bonuses that Wall Street has recently paid out may mean that future help that financial institutions get will come with more restrictions on pay.
Of course we can’t overlook the statement from the Federal Reserve. Though the Fed had little room to move on targeted rates since they’re already effectively at zero, the statement contained assurances that the Fed would continue to use all the tools available to it in order to support the financial markets.
Looking ahead
Most investors will be as eager to bid adieu to January as they were to see the end of 2008. Of course, though the month is over, we’ll still be hearing more about it next week. The economic calendar for next week will include many of the month end reports, including auto sales, the Institute of Supply Management index, and, most importantly, employment. Early in the week we’ll get an early read on employment with the ADP employment report, and then the week will finish with January’s unemployment rate. The market is expecting that unemployment climbed from 7.2% in December to 7.5% to January.
It will likewise be another busy week on the earnings front. Aflac, Mattel, BP, DR Horton, Electronic Arts, Merck, MetLife, Motorola, Northrop Grumman, Schering-Plough, Dow Chemical, Tyco, Walt Disney, and Yum! Brands will report between Monday and Tuesday. On Wednesday Alcatel-Lucent, Cisco, Kraft, Panasonic, Philip Morris International, Roche, Sunoco, Time Warner, and Visa will report. Thursday will be the busiest day of the week with reports from Burger King, Duke Energy, Fortis, GlaxoSmithKline, Hartford Financial, JDSU, Kellogg, MasterCard, Moody’s, News Corp., Unilever, and Western Union. The reports will slow down on Friday and feature earnings from Toyota.
While most of the financial company reports are behind us, it’s unlikely that we’ll have a very different tone from the earnings reports this week. As the economic downturn continues to set in, it’s hitting the bottom line of companies in most industries.
Potentially even more important in the upcoming week will be the government’s progress with its initiatives to stimulate the economy and bolster the financial system. With the stimulus package garnering no Republican support in the House, it will face a tough fight in the Senate this week. Meanwhile, investors will likely be keeping their ears open for any more chatter regarding the bad bank initiative.
There seems little reason to believe to that we’ll see a quick turnaround from the economic malaise that we’re currently mired in. But as heralded investor Warren Buffett pointed out in a recent interview with Tom Brokaw, the US has been through much tougher times than what we’re facing currently and come out the other side. He said:
I don’t know what the stock market will do in the next year. What I do know is that, if you go back to the 20th century, 100 years, you had two great wars, you had other very large wars, you had the Great Depression, you had the flu epidemic, you had a dozen recessions and panics, you had all kinds of things.
At the end of that century the average American was living seven times as well as the start of the century. The Dow Jones average went from 66 to 11,497. With all those problems. This is a country that has the ingredients that — well, it unleashes the potential of humans. And they’re still here.
We agree with Buffett’s sentiment — namely, that short term movements of the market can be difficult, if not impossible, to predict, but we’ll do well by investing in the long term growth of the US economy.
