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• Good News Bad News Where we are now 262009 Market Update

Good News Bad News Where we are now 262009 Market Update

written on February 09, 2009 by Frank Fantozzi

Since his inauguration President Obama and Congress has been moving swiftly to address the recession and financial collapse, but in some areas the recovery effort has been stalled by the transition and other issues.      Also, a raft of post-September economic and financial market statistics have been coming out that document a serious recession around the globe.  All this bad news has slowed the "healing" in credit markets and led to     further weakness in equity markets.  The S&P 500 is down about 10% so far this year, but still well above the low hit last November.  Hardest hit have been Financials, down nearly 30% year-to-date due to economic conditions and the dithering over how to use the Troubled Asset Relief Program (TARP).  Industrials and    Consumer Discretionary are the second and third worst performers, while Healthcare and Utilities are down less than 2%.  Given the economic backdrop, this relative performance picture indicates that investors may be through with the undifferentiated panic selling we saw in the fourth quarter, and are returning to discretionary investing based on policy and economic indicators.

So far the economic news, while grim, is at least not as grim as expected.  For example, the consensus expected about a 5.5% decline in real GDP in the fourth quarter, but when that report came out last week it showed a decline of "only" 3.8%.  That is still the biggest decline since the first quarter of 1982 when GDP fell 6.4%. There is some good news for us consumers; the price index for total personal consumption expenditures swung from an annualized quarterly rise of 5% in Q3 to a fall of 5.5% in Q4.  That is by far the largest quarterly fall in the price level seen since 1947 and the fastest swing from inflation to deflation.  The drop in the price level reflects discounting on many products and the sharp declines in energy and commodity prices.  The good news is that we got better deals shopping for the holidays.  The bad news is that many companies did not make much in profits.  The fall in energy prices is in our opinion unalloyed good news.  Compared to that horrible $145 per barrel oil price peak we hit last July, we have shaved more than $100 off oil prices, and this decrease will save U.S. consumers nearly $300 billion on energy spending.  In part, sky-high oil prices got us into this recession, and we think much lower oil prices will, over time, help get us out.

While all eyes have been on the President's stimulus package, we believe the Federal Reserve (the Fed) has been busily expanding its anti-recession programs and working to prevent protracted deflation (a word the Fed studiously avoids).  Various measures of the money supply are accelerating, and the Fed is starting to buy "large quantities" of government agency and mortgage-backed debt.  They have announced a similar program to buy consumer and small business debt as well as, for some odd reason, longer-term Treasury debt.  In our opinion, all these actions are meant to help stabilize a badly damaged financial system and stop falling prices, including home prices.  Given near infinite financial resources, we expect the Fed's efforts will be successful.  Of course, there may be a price to pay down the road in the form of a return to higher inflation, but it appears to be the right action given the extraordinary circumstances we are in today.

Where do all these developments leave us? 

I know many of us including me are not happy about much of what is taking place.  Bailouts are never pretty.  They are never fair, and lots of undeserving folks and institutions get benefits they do not deserve.  Like most of you, I did not spend a million dollars redecorating my office last year, nor did I get a big fat bonus from a company that lost money and ultimately required taxpayer assistance.  Neither I nor Planned Financial Services have required assistance from the TARP. 

We will work our way through this mess and return to growth.  We do not know if last November's stock market low marked the bottom, but we think that market valuations look attractive and that the majority of U.S. companies will weather this recession and return to growing earnings.  However, for a while longer the picture will remain gloomy and uncertain.

Many Americans are looking to our government to rescue the economy. We believe that the government can either help facilitate a delaying or accelerating impact on our economic recovery...the jury is still out. However, recovery lies in our small to mid-size businesses where approximately 70-80% of all new jobs are created. The reality is that these business owners have the greatest control on what decisions they make daily and the capital they place at risk. Through our determination despite the obstacles that are placed in our path, our will to operate effective, efficient and successful businesses will lead to our nation's economic recovery. This is the heart of capitalism.

On a lighter note, for those believers in the groundhog indicator out there...the groundhog saw his shadow this week. Historically, more often than not, that is associated with the markets' heading upwards; of course only time will tell. 

 

Frank Fantozzi, President

CPA, MT, PFS, CDFA, AIF     

Registered Investment Advisor
           

The financial consultants of Planned Financial Services LLC are registered representatives of and offer securities through LPL Financial. Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.