A Week in the Rearview – week ending 2/20/09
In the headlines
A look at some of the market movers over the past week:
- The US automakers reported on their progress and then asked for more money
- Trump Entertainment filed for bankruptcy protection
- President Obama signed the stimulus package into law
- Financier Allen Stanford was charged with falsely marketing $8 billion in high-yield CDs
- President Obama announced a new program that will inject as much as $275 billion into the ailing housing market
- The Federal Reserve once again ratcheted down its recovery expectations
- Hewlett-Packard released first quarter results that missed the mark; it also cut its 2009 expectations
- Chrysler may be reconsidering a merger with General Motors
- The US Department of Justice joined two lawsuits against Johnson & Johnson alleging illegal marketing of its heart drug Natrecor
- The New York Times’ board suspended the company’s dividend
- Wholesale prices increased more than expected, while consumer prices rose in step with expectations
- Fears of bank nationalizations worried investors, even as the White House tried to dismiss concerns
Commentary
It was a short week, but a painful one for investors. The trading week kicked off on Tuesday with a 4.6% drop, and by the time trading closed on Friday the S&P 500 was off nearly 7% for the week. Friday marked the fifth straight down day for the S&P in a start to the year that has taken 14.7% off the index.
On the economic front, housing starts came in well below expectations. While this is another sour note for the homebuilding industry, it could be a positive for the housing market as lowered housing inventory will help lead to a stabilization of prices. Both PPI and CPI were ahead of what the market anticipated, a jump largely attributed to energy prices. Initial unemployment claims also came in higher than expected, jumping to 627,000.
The release of the Federal Reserve’s minutes from its January meeting provided some extra fodder for negative sentiment on Wednesday as the Fed reviewed a host of negative indicators and revised down its own projections. Though Fed governors seemed to see some impact of the Fed’s massive monetary programs, it deemed the majority of the new economic data to be to the downside and now believes that contraction and increasing unemployment will continue through 2009, with a slow recovery taking place in the years following. The Fed will next meet in mid-March and is expected with nearly 90% probability to keep its target at 0-0.25%.
The biggest market mover of the week, though, was further questions over the future of banking. A major driver for the bad start to the week was a Moody’s report that European emerging markets would be hit worse than the rest of the world during the downturn and that that weakness would pressure Western European financial institutions. At the end of the week, banking sentiment took a further hit as US investors once again seemed to see a clear path to nationalization of some US banks. Losses on Friday were only pared after both the White House and a few private market analysts spoke out against the idea of nationalization.
Looking ahead
We still have a few more weeks of heavy earnings announcements before the parade begins to taper off. As I noted last week, the earnings reports this week will largely be overshadowed by macroeconomic events and discussion. The notable releases for the week include Nordstrom, Home Depot, Macy’s, Target, Garmin, TD Bank, Dell, and Gap.
The economic calendar, on the other hand, will be lighter in terms of number of reports, though is likely to spark far more discussion. On Tuesday both consumer confidence and the CaseShiller Home Price Index will draw attention, as will existing home sales, initial unemployment claims, new home sales, and the Chicago purchasing manager’s index later in the week. The highlights of the week, however, will be a look at fourth quarter GDP on Friday and, more importantly, Fed Chair Ben Bernanke’s semi-annual Monetary Policy Report on Tuesday. Bernanke’s report will be given to the Senate Banking Committee and will cover the state of the economy and review all of the actions that the Fed is taking to combat the economic contraction.
As we digest a truckload of negative economic data, I think it’s high time that we address the comparisons that have been made between today’s situation and the Great Depression. There are some similarities between the two — banking problems, a falling housing market, a falling stock market, rising unemployment. But I think it’s hyperbole to truly say that we’re looking at a comparable situation.
In the years following the initial salvo in 1929 US GDP declined — in constant dollars — by more than 25%. This is an absolutely massive contraction, and is not even in the same ballpark with the 1% to 2% decline that most economists are predicting before recovery sets in. At the same time, unemployment spiked during the Great Depression to a level that, at its peak, left one out of every four Americans out of work. Again, this is far more than the 8% to 9% unemployment that is at the high end of most projections today.
Economists certainly may be underestimating the severity of the current contraction, but they would have to be wrong to a huge degree for the current expectations to morph into Great Depression conditions. Even a doubling of the top end of most predictions — a 4% decline in GDP — would not be anywhere near the kind of economic destruction seen during the Great Depression.
The government’s response to the problems is another key difference between the Great Depression and today’s situation. During the Great Depression, the government’s response for the first few years of the decline was to sit back and do nothing, hoping that liquidation of the banking system and capital markets would be the right approach to “resetting” the financial system. Many blame the depth of the Great Depression on this lack of action. The government’s response to today’s issues is anything but to stand still — a great deal of monetary stimulus has been pumped into the system and with the fiscal stimulus bill now signed into law we can look forward to a jolt from that angle.
This isn’t to minimize the impact of today’s economic problems. It has been more than 20 years since we’ve seen an economic contraction as bad as this and many Americans may have simply forgotten what it’s like to experience a shrinking economy. The financial pain that the US as a whole is feeling is very real, as is the financial pain that many families are feeling. But again, this is a far cry from the devastation that the Great Depression brought.
