A Week in the Rearview – week ending 2/13/09
In the headlines
A look at some of the market movers over the past week:
- Early week rumor swirled about a potential bankruptcy at GM and Chrysler
- IMF chief Dominique Strauss-Kahn said the world’s advanced economies are already in a depression
- Switzerland’s UBS posted a larger-than-expected loss as did Credit Suisse
- Treasury Chief Timothy Geither announced the Treasury’s new bank rescue measures, but disappointed Wall Street with a lack of details
- The heads of the major US banks testified before Congress
- Aluminum Corp of China announced a $19.5 billion investment in miner Rio Tinto
- Outrage continued over the bonuses given out by Merrill Lynch
- Reports revealed that Sirius XM may be seeking bankruptcy protection
- The Senate approved its version of the stimulus plan and Congress set to work agreeing on a final plan
- Reuters reported that a subsidy plan for ailing homeowners may be on the way
Commentary
I will be escaping the market for a day to head into the mountains where I can clear my head of bailouts and stimulus for at least a couple days. While I won’t be here for the last day of the trading week, it seems pretty clear what the market will be focusing on Friday and into next week.
Through the close of trading on Thursday it was a rough week for investors. Though three out of the four trading days saw the S&P 500 close up, Tuesday landed a shuddering blow. Heading into Friday’s trading, the S&P had shed 3.8% on the week.
Though earnings were still flooding into the market, they clearly took the back seat during the week. Both the stimulus plan and the Treasury’s new bank rescue plan were the focus for most investors and traders during the week, and they didn’t create a very positive market sentiment.
Despite the President’s continued urging for a hasty passage of the stimulus bill, haggling between Democrats eager to push the bill through and Republicans who are deeply skeptical of the bill continued. After an early-week passage of a version of the bill that the Senate crafted, Congress members joined together to try and cobble together a final bill that both houses could agree on.
Congress members worked late into the night on Thursday, hoping to finalize the bill for a House vote on Friday and a Senate vote either late Friday or over the weekend. Though the Senate’s version of the bill received tepid votes from a few Republican Senators, it appears that if the bill does pass it will be more or less without Republican support.
Meanwhile, the announcement of the new banking rescue plan by Treasury Secretary Tim Geithner was a disaster — at least as far as the stock market was concerned. As I noted in last week’s post, there were very high hopes for this plan and it seemed that disappointment was almost inevitable. In the end, rather than an actionable checklist, the plan was more of a new set of guidelines for how Treasury’s financial rescue actions will be carried out. Market participants roundly found little in the announcement to validate their previous optimism and brought the markets tumbling nearly 5% on the day.
Looking ahead
Despite the market’s holiday on Monday, it will be a busy week next week. Earnings will still be in high gear, though my expectation is they will continue to take a back seat, as most investors have already reached conclusions on the overall fourth quarter earnings performance. Among the week’s highlights on the earnings front will be Wal-Mart on Tuesday; Deere, Hewlett-Packard, and ING on Wednesday; and Lowe’s and JCPenney on Friday.
The economic calendar will likewise be packed. The housing market has shown glimmers of life lately — mainly a confirmation that heavy declines in home prices are finally incenting buyers. We’ll get more color on this on Wednesday when we get January’s housing starts. The weekly unemployment claims will continue to be a highlight for the foreseeable future. The high point of the week, however, will be the release of the producer price index on Thursday and the consumer price index on Friday. Both are expected to stay relatively flat with last month.
Of course what will dominate the news over the next week is the passage (or non-passage) and the outlook for the stimulus plan, as well as continued digestion of Secretary Geithner’s handling of the banking woes.
I think it’s important that we take a step back here to take a deep breath and consider the recent reactions to the government’s actions to address the economy. The first misnomer that we should dismiss is the idea that last Tuesday the market was “saying” that the Treasury’s plan for the financial system would not work. This is simply not true. The market’s reaction to Secretary Geithner’s press conference was a combination of disappointment in the lack of specific details along with the age-old stock market reaction of buying on rumor and selling on news — the latter point likely having more of an impact than the former.
Further, there seems to be a lot of discussion going on right now about whether the financial bailouts — both actions taken and actions expected — along with the hopefully soon-to-come stimulus package will work. This, of course, is a perfectly good topic of debate, however, much of what I’ve seen seems to imply that the US economy will see some sort of very near term impact from the bailout/stimulus actions. In reality, there is a definite lag in the impact that stimulative actions have on an economy and it may be as long as a year or more before we see the full effect of the bailouts and stimulus on the economy.
The point here is that we are likely to see continued volatility in the markets as impatience gets the best of traders and analysts. High hopes for the economy to turn on a dime will likely be met with disappointment as the economy slowly recovers. On the other hand, pessimism over the pace of recovery may be met with hopeful signs as the recovery does take hold.
The actions that the government is currently taking are daunting and without precedent, and I don’t pretend to agree with every last detail of what they are doing. However, the overarching goal of using fiscal stimulus to jumpstart economic activity and keep as much of the productive capacity of our economy chugging along is something I fully agree with.
Continuing to sock money away in your retirement account and buying into the market at these low levels is still, in my opinion, the best thing that I can suggest at this point. For a Wall Street trader, a year or two of troubling performance is as good as a lifetime. For a diligent saver targeting retirement though, a couple years of depressed markets is more likely than not the opportunity of a lifetime to buy at prices that will yield superior results in the decades to come.
