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• Is the Market Turning Around

Is the Market Turning Around

written on May 07, 2009 by Frank Fantozzi

Here we are with the blessings of spring upon us.  In these recent weeks the financial markets have started to rebound from the lows encountered this winter.n Still, broad equity price indices remain well below the 2007 peak levels and from a long-term perspective are about 40% to 45% below the peaks hit in 2000 and 2007.  So, we have a long road to a full recovery; however, there are some signs that the market's recovery is progressing.

The first quarter company earnings reporting season is closing and it looks like things are turning around, after generally bad earnings reports for Q4-2008.  The earnings turn looks to be partly due to a reduction in bank loan write-offs, but also due to company cost cutting and, despite dire predictions of deflation, some ability to avoid a collapse in the prices of goods and services sold.  Excluding energy, the Consumer Price Index (CPI) is up 2.2% over the last year including modest gains over all three months of this year.

Of course cost cutting has its dark side.  The worker layoffs have pushed the unemployment rate to 8.5% and we suspect they will climb slightly more.  Inventory cuts and a drop in spending on plant and equipment by companies accounted for nearly half of the 6.3% decline in fourth quarter GDP and various monthly data for the first quarter indicates further weakness. nHowever, private sector actions in recessions, while painful, can be the most powerful factor driving recoveries.

On the brighter side, some measures of home prices are showing a rebound in February and March and the sharp drop in home sales appears to be leveling off.  With home price declines, lower mortgage interest rates and, amazingly enough, still rising real personal income (due to lower energy prices), the housing affordability index is, by a large margin, at an all-time record high.  Speaking of energy prices, we are getting much needed sustained relief for households, with crude oil down about 65% from that terrible peak in July 2008 and natural gas down about 70%.  All this has helped consumer confidence rebound strongly in April.

Though we are seeing some improvement, we are by no means out of the woods.  Uncertainty is still a factor with herd mentality that can impact market participation, and we still do not know if the Obama administration policy actions, the Federal Reserve and other agencies' plans will work well.  The perception of rewarding mediocrity and even failure while not placing money in the hands of those who have created success is troubling many.  We are hoping they can manage the car industry while they cannot balance our spiraling out of control deficit.  Additionally, there is no discussion on how we save Social Security, Medicare, and Medicaid.  Who will pay for this and will the American Public stand for more taxes? Between Federal, State, Local income, and excise taxes, tax freedom day grows farther out. Dividing wealth equally will not result in the creation of more wealth.

While we do think there will be some failures, we are already seeing some positive results.   Many, but not all, of the big banks appear to be recovering and while big bank lending is down recently, smaller banks that stuck to their core business without severe leveraging have been expanding lending.  Interest rates on municipal, mortgage, corporate, commercial and other debt, previously viewed as "way too risky to invest in", have come down signaling renewed investor interest, allowing towns, states, home buyers, companies, and other borrowers expanded access to credit markets.  It is not business as usual, but it looks a whole lot better than the "frozen credit markets" we saw earlier.

There is an expression, "accelerating to the bottom", that means things are getting worse at a faster pace.  That would be bad.  However, looking across the financial and economic landscape, we do not see that acceleration at present but a deceleration.  We see a moderate, but still jittery financial recovery, and an economy that is finding a bottom and struggling with a turnaround.  People talk about V or U or maybe L-shaped recoveries though talk about a return to the Great Depression or replicating Japan's experience is heard much less now.  The information on the markets and the economy looks to signal more of a U with the bottom probably behind us in financial markets and the economy headed for a flat summer with recovery starting in the autumn.  We are hoping for a better holiday season than last year's, economically speaking.

Frank Fantozzi, President, CPA, MT, PFS, CDFA, AIF

Registered Investment Advisor          

p.440.740.0130x222                                                                        
e. Frank@PlannedFinancial.com

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.