Stock Market Recap, February 6, 2009

Losing Streak Ends!

Last week brought an end to the weekly losing streak. The broad market gained 5.2% for the week, an excellent start to the month of February. Those gains are encouraging after following on the heels of the worst January performance on record. The tech sector was the real market leader as evidenced by a NASDAQ gain of 7.8%. The market though showed volatility after having been down early in the week before rallying over the last two trading sessions. Investor sentiment appears to be growing more positive, particularly now that the large institutional funds are done with massive selling. What was the driver for the gains this week? There were no real surprises on the economic front, so we speculate the optimism came from hope and closure over the pending government packages for the economy and financial sector. We are encouraged with the market advance, but caution there is still much uncertainty on the details of these packages. We will likely learn more details next week and that additional clarity will likely drive the market higher. However, we still expect the market to remain rocky over the near term.

Job Losses Hit Record Highs!

Quarterly Earnings releases continued last week and overall reflect the weight the poor economy is having on earnings and future outlooks. The uncertainty and lack of clarity on future guidance is still an achilles heel for many companies. Both the manufacturing and services surveys recently completed beat market expectations, but remain at poor levels indicating contraction. Personal spending and personal income both declined, not a big surprise given the state of affairs. Jobless claims hit another record high, and major companies continue to announce additional layoffs. Last week, it was reported that nearly 600,000 positions were lost in January, the largest monthly loss in 34 years. Surprisingly, the market rallied following announcement of the poor jobs data, presumably from the optimism surrounding government progress on the economic and financial sector stimulus. The unemployment rate now stands at 7.6%, but that is likely to grow over the next few months as we search for a climax in jobs lost. The financial sector had a volatile week, but ended the week over 6% higher as optimism returned over hope of financial sector reform.

Market Beating Foresight

Fourth quarter earnings reports continue, but there is little doubt most companies are struggling as evidenced by the reports over the last few weeks. The Senate is working on tweaks to the Obama spending plan, and the plan appears to be gaining momentum. But the big market mover next week will likely be the government plan for the financial sector. Geithner is scheduled to outline this plan on Monday. The market will likely react favorably, as investors seek clarity and details over the financial sector program. Personally, we hope to see government measures that bring more transparency and accountability over the capital infusions provided to banks. The market is looking for a plan, and greater definition on that plan of action will restore investor confidence at least for the short term. Next week, additional reports will again be released on the economy, but they will likely provide more evidence of the decline in housing, jobs, and economic growth. As we have said before, the market will remain rocky over the next several months as the economy finds better footing and searches for bottoms in housing and jobs. Volatility stayed high despite the market advance last week, although it remains well below the extremes from October and November. Short term, the government spending programs may provide an additional boost to the market. However, we remain concerned over the next three months as the market will remain rocky as corporate earnings deteriorate and job losses reach critical mass. Consumer spending is extremely weak and we do not see consumer confidence returning any time soon. We are currently 30% invested in our stock portfolios, but may try to increase that allocation to take advantage of renewed optimism in the financial sector following the Treasury announcement. However, we will not increase our stock allocations more than 50%, and will increase our stock allocation above those levels only over time. If the market advance continues, our portfolio returns may begin to lag the market return slightly since we are limited our stock allocation to 50% or below. However, it is still very early in the New Year, and we would rather lag the market advance at this stage than risk another premature rally and meltdown. As the market builds strength, our stock allocation will rise. For now, investors should remain cautious and very selective with any investments that are made right now.

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