A year in the rearview – 2009
In the headlines
The year’s biggest news:
- The stock market opened the year in complete freefall, but then mounted an incredible rally through the end of the year
- Barack Obama was sworn in as the 44th President of the United States
- Confidence was stoked by the results of banking stress tests
- Bernard Madoff pleaded guilty to running a multi-billion dollar Ponzi scheme
- The government passed a $787 billion economic stimulus plan
- Chrysler declared bankruptcy and General Motors soon followed suit
- Unemployment rocked Main Street as the national unemployment rate topped 10%
- Health care reform sparked heated national debate
- Swine flu swept the country and was called a “public health emergency” by the World Health Organization
- Microsoft launched its latest assault on Internet search, Bing
- Foreclosures continued to be a drag on the housing market, while housing prices raised question marks
- “Cash for Clunkers” was met with mixed sentiment
- Embattled Bank of America CEO Ken Lewis stepped down from his post
- The government reported a $1.4 trillion deficit for fiscal year 2009
- Goldman Sachs announced massive profits while attracting the ire of Main Street
- World markets shuddered as Dubai World struggled under a heavy debt load
- Federal Reserve Chairman Ben Bernanke had ups and downs throughout the year, but kept the backing of President Obama
Commentary
It’s been quite the volatile year for equity investors. After falling a massive 25% through the beginning of March, the S&P 500 index went on to put on a fireworks display, running up 65% between the March low and the end of the year. By the time all the smoke had cleared, the S&P finished the year up 24%.
The drivers behind the market’s wild performance for the year, meanwhile, were somewhat of a mixed bag. As the market’s performance over the past nine months suggests, the overall picture for the U.S. and world economy looks like it’s improving. However, there are still some nagging red flags that have led many experts to caution about throwing caution to the wind quite yet.
On the bright side, the banking and financial services landscape doesn’t look nearly as dire as it did when we entered the year. Just three months before the close of 2008 was when the U.S. financial system went absolutely haywire with the bankruptcy of Lehman Brothers, the massive government bailout of AIG, and Fannie Mae and Freddie Mac being placed into government conservatorship.
While banks aren’t completely out of the woods, many of the major financial institutions that received government support found themselves on stable enough ground to pay back the TARP loans. And for the financial firms that are still highly questionable — such as AIG, Fannie Mae, and Freddie Mac — government support, for better or for worse, seems to be guaranteed.
Though it wasn’t all that long ago that unemployment broke over 10%, employment numbers have made some strides through 2009. Initial unemployment claims — which tend to be a more current indicator of employment trends than the unemployment rate –finished out the year with a reading of 432,000 after peaking at well over 600,000 early in the year. While we’d ideally like to see the economy adding jobs, the decline in the level of unemployment claims is definitely an encouraging sign.
Manufacturing data, meanwhile, posted some even better gains and by year end many manufacturing indexes were in expansionary territory. While productivity gains have been credited in the area of manufacturing, as well as other areas of the economy, many analysts have suggested that growing business activity will likely be a precursor to more robust hiring trends.
Meanwhile, the Federal Reserve has backed up these numbers by affirming that it sees a similar pattern of economic pickup. In the Fed’s most recent monetary policy statement, it stated that “information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating.
But for all of the good news that came about in 2009, there are still concerns. The housing market made some gains in both sales volume and prices in the back half of the year, but foreclosures and delinquencies continue to haunt residential real estate. In addition, many are looking warily at the commercial real estate market as economic conditions have hit the sector hard and the true pain in that segment may not be fully realized yet.
As positive as some of the employment numbers have been, there continues to be a great number of American workers without jobs. As a key piece to the U.S. economic puzzle, consumer spending will play a big role in the eventual recovery. Until the job market starts make gains, the economy may still find itself sputtering as consumers find themselves light in the wallet.
Finally, there is a great deal of concern over the government’s current role in the economy. Government budget deficits have soared as a result of increased spending designed to jump-start the economy, and Uncle Sam has significant stakes in a number of private companies. The ongoing debate over reform of national healthcare could also end with the government taking on another big financial commitment.
Looking ahead
The stage has been well set for an interesting year ahead. As discussed above, the U.S. economy appears to be making strides towards recovery, even as sore spots continue to cause pain in certain sectors. The key ingredient for the stock market in 2010 is likely just how much veracity the economic recovery has and whether the recovery will be one that will bring the country back to growth rates typical of recent decades or show a slowdown in growth.
The healthcare reform package, which President Obama had originally hoped would be dealt with in 2009, will be major issue at the beginning of the year. While both Congressional houses have now passed a version of the bill, the critical jump still needs to be made from two somewhat disparate bills to one bill that is acceptable to both houses and the President. Depending on the content of the final bill, there could be wide-ranging impact on everything from the insurance industry, to business in general, to the economy as a whole.
Assuming recovery signs continue to sprout up, the Federal Reserve will likely be a top discussion topic in 2010. The low interest rates that the Fed is currently supporting have been a key tool in sparking the economic turnaround, but continuing with those rates for too long could cause price inflation. As recovery continues to set in, the Fed remains confident they will be able to effectively reign in expansionary policies to control this threat.
