Quote for the quarter. “Never doubt that a small group of thoughtful,
committed citizens can change the world. Indeed, it is the only thing that ever
has.” – Margaret Mead
The
quarter in brief. Was
that the worst of it? Maybe that is what the fourth quarter of 2008 represented
– the trough of a very rough recession. Some economists feel that way. Wall
Street endured some serious pain in the fourth quarter. On November 20, the
S&P 500 closed at 752.44, a low unseen since 1997; the Dow Jones Industrial
Average closed at 7,552.29.1 Only 14 months earlier, both indices
had hit all-time highs. Fortunately, the S&P 500 and the DJIA respectively
ended the year at 903.25 and 8,776.39; Santa Claus was a little late, but the
DJIA did pull off a 284-point rally across December 30-31.2
The $700 billion bailout rolled out, but the Treasury
Department’s mission changed; instead of buying up bad assets, it poured cash
into private banks. The Federal Reserve announced a new relief program to do
what the Treasury originally wanted to do. The Fed slashed the key interest
rate to a target of between 0% and 0.25% and announced a program to heal the
consumer credit market. Statistics bore out that consumers were less confident
and spending less. Oil prices fell to their lowest level in four years, and
retail gas prices followed. Mortgage rates and consumer prices fell. Detroit
automakers sought bridge loans from the federal government. The housing and
commodities sectors hoped relief would come in the coming quarter, as did Wall
Street.
Domestic economic health. On
October 3, President George W. Bush signed the $700 billion bailout plan into
law, incorporating $149 billion in tax breaks for the consumer.3
Over three weeks, the Fed cut the benchmark interest rate by a full point down
to 1.0.4 The Treasury Department injected $125 billion into nine
major banks in exchange for ownership stakes – shares paying a 5% dividend to
taxpayers for the next five years.5 The Fed announced it would buy
large quantities of commercial paper in the coming months.6 Key
indicators for October revealed core problems. The Reuters/University of
Michigan survey of consumer confidence went from 70.3 in September to 57.5.7
The jobless rate jumped .4% in October to 6.5%, the highest level in 14 years.8
America’s manufacturing sector saw its biggest monthly
contraction since 1982.9 Retail sales dropped 2.8% in
October, the biggest monthly decline since the Commerce Department began
keeping track in 1992.10
Days after an especially volatile month ended on Wall Street,
Sen. Barack Obama (D-IL) won the presidency. In November, he selected New York
Fed president Tim Geithner as his Treasury Secretary,
and former Treasury Secretary Larry Summers to head the National Economic
Council.11,12
The Fed announced the
creation of TALF, the Term Asset-Backed Securities Loan Facility, which would
buy $600 billion in troubled assets from Fannie Mae, Freddie Mac and Ginnie Mae and another $200 billion in asset-backed
securities to help get credit to consumers.13 Assorted reports brought disparaging news.
The U.S. lost 533,000 jobs in November, the most since December 1974.14 A
report showed November retail sales down 1.8%.15 Another showed consumer
spending down 0.6%, but it rose 0.6% when adjusted for inflation.16
December brought Chrysler and General Motors a gift: $13.4
billion in loans from Congress, with $4 billion more potentially available.17 We
saw the fifth straight month of contraction for the manufacturing sector – the
ISM index came in at 35.4.18 The
malls didn’t fare so well either: MasterCard Inc.’s SpendingPulse
data service recorded total store sales down approximately 3.0% across November
and December.19 By the end of the year, KB
Toys, Linens ‘n’ Things, Shoe Pavilion, Steve & Barry’s, and Whitehall
Jewelers had all gone out of business.
Major indexes. October’s big dive
turned 4Q 2008 into a dire one for stocks. But there was a rebound: the S&P
500 rose 20.04% between the close of trading on
November 20 and the end of 2008.20
|
% Change
|
4Q 2008
|
2008
|
|
DJIA
|
-19.12
|
-33.84
|
|
NASDAQ
|
-24.61
|
-40.54
|
|
S&P 500
|
-22.56
|
-38.49
|
Source: CNBC.com, 12/31/08 2
Indices are unmanaged, do not incur fees or expenses, and
cannot be invested into directly. These returns do not include dividends.
Global economic health. It
was a bad quarter for industry worldwide. Eurozone
manufacturing activity contracted in each month of 4Q 2008, extending a “losing
streak” to seven months; in December, it contracted at the most alarming rate in 11
years. In December, the U.K.’s manufacturing sector had its second
worst month since 1992. China’s manufacturing sector
contracted for the fifth consecutive month in December.21
The bulk of European economies
officially entered a recession in the fourth quarter, along with the economy of
Japan.22 China, India and
Thailand announced economic stimulus packages to counter presumed or confirmed
recessions. India’s
exports fell a sharp 9.9% in November; however, inflation cooled from a 16-year
high of 12.91% in August. China made five interest rate cuts in a three-month
period ending December 22.23 Economists
surmise that China’s fourth quarter growth may come in as low as 2%.24
World financial markets.
Markets suffered around the world during
the fourth quarter, although quite a few gained following the Dow/S&P 500
low point of November 20. For example, the MSCI World Index and MSCI Emerging
Markets Index gained 18.7% and 21.9% between November 21 and the end of the
year.25 But the year-end numbers were not helped by a quarter
marked by mid-November’s enormous descents. At year’s end, the Shanghai
Composite Index was down 65.4%, the Nikkei 225 down 42.1%, the Hang Seng down 48.3%, and the Sensex
down 52.4%. In Europe, indexes also lost big ground in the fourth quarter: the
FTSE 100 wound up losing 31.3% on the year, still better than any of the big
three U.S. indices and better than the German DAX index (-40.4%), the Dow Jones
Stoxx 600 (-46.0%) and France’s benchmark CAC 40
(-42.7%).26
Commodities markets. This sector offered no
sanctuary from the market downturn. Oil ended the quarter at $44.60 per barrel,
and it had to rally on December 31 to get there; oil futures were $100 higher in
July and fell to the $35 level in late December. Gasoline futures ended the quarter down 59.2% for the year.27
Gold finished
the quarter at $883.60, rising 5.4% for 2009, but silver and copper lost ground
and respectively lost 35.6% and 56.5% for 2008. Despite rallies at the end of
the quarter, corn finished down 10.6%, soybeans down 18.3% and wheat down 31.0%
for 2008.27
Housing
& interest rates. Again,
no upturn here. October data showed housing starts down
by4.5%, building permits down by 12%, existing home sales down 3.1% and new home
sales down 5.3%.28, 29. Available
November
data wasn’t much better: the National Association of Realtors said residential resales fell by 8.6% for the month, and the U.S. Census
Bureau November survey had new home purchases 2.9% below October levels.30
As a
byproduct of the Fed’s radical cuts, mortgage interest rates really diminished
over the fourth quarter. Prime opportunities emerged for those who could
refinance. By the last week of December, Freddie Mac’s national survey had 30-year FRMs at historic lows, averaging 5.10%. 15-year FRMs
came in at 4.83%, 1-year ARMs at 4.85% and 5-year ARMs at 5.57%.31
First quarter outlook. Traditionally, stock
market analysts have viewed the opening trading days of a year as a barometer
of the quarter (and year) to come. So perhaps we should watch closely. We saw a
powerful rally on the first trading day of 2009, though volume was light; in
the first full week of the month, we will see how investor optimism holds up in
the wake of new unemployment and wage numbers, and gauges of factory orders, wholesale
inventories, construction spending and the health of the service sector.
Much has been written already about the
low point the markets hit on November 20; that bad trading day could eventually
be remembered as the bottom of this bear market, if we evade economic upsets of
the kind that marked last year. Has the market more or less stabilized? Might
housing, corporate earnings and consumer spending take a turn for the better?
Realistically, those are second and third quarter (some might say third and
fourth quarter) questions. This quarter presents a test for the economy and the
market – a test of the government rescue plan, a test of investor and consumer
confidence. But recessions don’t last, and we are investing
for the long run rather than the next two or three quarters. Please keep
that in mind. Perhaps three months from now, we will look back on a first
quarter that was better than projected.
Please feel free to forward this article to family, friends, or
colleagues. If you would like us to add them to the list, please reply to this
e-mail with their e-mail address and we will contact them and ask for their
permission to be added.
The Dow Jones Industrial
Average is a price-weighted index of 30 actively traded blue-chip stocks. The
NASDAQ Composite Index is an unmanaged, market-weighted index of all
over-the-counter common stocks traded on the National Association of Securities
Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500)
is an unmanaged group of securities considered to be representative of the
stock market in general. It is not possible to invest directly in an index.
NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York
Stock Exchange (the "NYSE") and NYSE Arca
(formerly known as the Archipelago Exchange, or ArcaEx®,
and the Pacific Exchange). NYSE Group is a leading provider of securities
listing, trading and market data products and services. The New York Mercantile
Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange
and the preeminent trading forum for energy and precious metals, with trading
conducted through two divisions – the NYMEX Division, home to the energy,
platinum, and palladium markets, and the COMEX Division, on which all other
metals trade. The MSCI World Index is a free-float weighted equity index that
includes developed world markets, and does not include emerging markets. The
MSCI Emerging Markets Index is a float-adjusted market capitalization index
consisting of indices in more than 25 emerging economies. The Shanghai Stock
Exchange Composite Index is a capitalization-weighted index that tracks the
daily price performance of all A-shares and B-shares listed on the Shanghai
Stock Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the
Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of
Asian stocks. The Hang Seng Index is a free-float
capitalization-weighted index of selection of companies from the Stock Exchange
of Hong Kong. The Bombay Stock Exchange Sensitive Index (Sensex)
is a cap-weighted index of 30 stocks; selection of the index members has been
made on the basis of liquidity, depth, and floating-stock-adjustment depth and
industry representation. The FTSE 100 Index is a share index of the 100 most
highly capitalized companies listed on the London Stock Exchange. The DAX 30 is
a Blue Chip stock market index consisting of the 30 major German companies
trading on the Frankfurt Stock Exchange. The Dow Jones STOXX 600 Index is a
subset of the Dow Jones STOXX Global 1800 Index and represents large, mid and
small capitalization companies across 18 countries of the European region. The
CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40
companies listed on the Paris Bourse. These are the views of Peter Montoya
Inc., not , not of Gary Hokin and/or Nikoh Securities Corporation/
Hokin Investment Advisors, and should not be construed as investment advice.
Neither Gary Hokin and/nor Nikoh
Securities Corporation/ Hokin Investment Advisors give tax or legal advice. All information is
believed to be from reliable sources; however, we make no representation as to
its completeness or accuracy. The publisher is not engaged in rendering legal,
accounting or other professional services. If other expert assistance is
needed, the reader is advised to engage the services of a competent
professional. Please consult Gary Hokin for further information. Additional
risks are associated with international investing, such as currency
fluctuations, political and economic instability and differences in accounting
standards.
Citations.
1 money.cnn.com/2008/11/20/markets/markets_newyork/index.htm [11/20/08]
2 cnbc.com/id/28451744 [12/31/08]
3 bloomberg.com/apps/news?pid=20601103&sid=an09c2IjGttE&refer=news [10/3/08]
4
economictimes.indiatimes.com/Opinion/Are_we_in_Rome/articleshow/3656562.cms [10/31/08]
5 cbsnews.com/stories/2008/10/14/national/main4521335.shtml [10/14/08]
6
nytimes.com/2008/10/08/business/08fed.html?_r=1&bl&ex=1223524800&en=6b2e328b1376df03&ei=5087%0A&oref=slogin [10/8/08]
7 chicagotribune.com/business/chi-biz-consumer-confidence-oct17,0,705235.story [10/17/08]
8 bloomberg.com/apps/news?pid=20601068&sid=a5R951BQWpxI&refer=home [11/7/08]
9
online.wsj.com/article/SB122589706014701565.html?mod=googlenews_wsj [11/5/08]
10
smartmoney.com/breaking-news/smw/?story=20081114084053 [11/14/08]
11 time.com/time/nation/article/0,8599,1861895,00.html [11/25/08]
12 marketwatch.com/news/story/victim-circumstances----ben-bernanke/story.aspx?guid={7D1F8DC3-B041-4057-A9D4-6119389A7482} [11/25/08]
13 money.cnn.com/2008/11/25/news/economy/paulson_consumer/?postversion=2008112512 [11/25/08]
14 online.wsj.com/article/SB122848262764182657.html?mod=googlenews_wsj [12/5/08]
15
usatoday.com/money/economy/2008-12-12-retail-sales-wholesale-prices_N.htm [12/12/08]
16
marketwatch.com/news/story/consumers-gain-purchasing-power-november/story.aspx?guid={03980F9F-A180-4B8F-83A0-204B0A6DED64} [12/24/08]
17 freep.com/article/20081219/BUSINESS01/81219021 [12/19/08]
18
money.cnn.com/2009/01/02/news/economy/ISM/ [1/2/09]
19 money.cnn.com/2008/12/26/news/economy/holidaysales_finalnumbers/?postversion=2008122612 [12/26/08]
20
money.cnn.com/quote/historical/historical.html?pg=hi&close_date=11%2F20%2F08&mode=add&symb=SPX [12/31/08]
21 google.com/hostednews/ap/article/ALeqM5h3kgMAkbLwyfxBdjzw8Pc4KZ7DhQD95F3I3G0 [1/2/09]
22 online.wsj.com/article/SB123086102331648101.html?mod=googlenews_wsj [9/12/08]
23 bloomberg.com/apps/news?pid=20601091&sid=aZ817pqoYG4Y&refer=india [1/2/09]
24 news.bbc.co.uk/2/hi/business/7805644.stm [12/31/08]
25 marketoracle.co.uk/Article8017.html [12/31/08]
26 online.wsj.com/mdc/public/page/2_3022-intlstkidx.html?mod=mdc_intl_pglnk [12/31/08]
27 google.com/hostednews/ap/article/ALeqM5jND4r3B-VBZu2Ogg2_yzjYnPIP8gD95DVGB80 [12/31/08]
28 money.cnn.com/2008/11/19/news/economy/housing_starts/index.htm?postversion=2008111910 [11/19/08]
29 msnbc.msn.com/id/27926166/ [11/26/08]
30 money.cnn.com/2008/12/23/real_estate/home_sales_November/?postversion=2008122315 [12/23/08]
31 foxbusiness.com/story/markets/economy/mortgage-applications-index-rises--year-high/ [12/31/08]