Stock Market Recap, February 27, 2009

Worst Start Ever Brings 12 Year Lows!

Ouch...another very tough week on Wall Street as the broad market lost -4.5% for the week bringing the Year to Date loss to -18.6%! In the long history of the stock market, that is the largest decline ever over the first two months of the year. Furthermore, the -18.6% decline brings the broad market index to a 12 year low. Investors that are long stocks are clearly losing money, and most are losing lots of money. Could we now be at market lows? We sense investors are very apprehensive with many sitting on the sidelines. Volatility and fear could be poised for another strong run. If volatility returns, the market could take another severe turn downward. Our concern is that we just do not see a lot of positives on the immediate horizon to help push the market significantly higher, particularly in light of the worsening economy. Even if the market has hit bottom, the upside may be limited over the short term, whereas the downside risk remains high. In that light, for the near term, we do not like the risk reward tradeoff for the long side of the market. Investors with long time horizons (5-10 years) could consider buying now, but even then we would suggest only slowly entering the market with incremental stock allocations over the next six months. In other words, if you want to resume investment in this market, invest 10% to 20% of your available cash into stocks each month. Investors do not need to hit the market bottom, to be successful over a long time horizon.

Economic Conditions Deteriorate!

Last week the financial sector and economy were again the big market drivers, although there was a surprise development in Healthcare. Investors remain wary over nationalization of large banks as the government now owns 36% of Citigroup common stock. The Obama administration announced its Capital Assistance Program, which includes stress tests for banks that will determine the capital assistance levels provided by the government. But it was the deteriorating economy that brought the most bad news. Existing and new home sales, along with home prices all declined more than expected and provided further evidence that we have not yet hit that elusive bottom in housing. Bernanke gave the market some hope in his latest congressional visit when he said the recession may end in 2009 with recovery in 2010. We hope the Fed chairman is right, but suspect that could be a little optimistic given that economic conditions continue to deteriorate. For example, fourth quarter GDP was reported to be sharply lower (-6.2%) than its advanced reading of -3.8%. That is a big difference and shows just how quickly economic conditions deteriorated. The other surprise was the announcement from Obama that he will cut Medicare spending as part of his healthcare plan. The healthcare sector, which had been holding up better than most, proceeded to lose more than 11% for the week following those remarks. On the employment front, jobless claims continue to hit record levels resulting in the lowest consumer confidence readings ever recorded.

Market Beating Foresight

Next week the Federal Reserve will provide details on its program to shore up consumer and small business lending. In addition, there is the labor report that is due out on Friday. Other than those items, there are not a lot of planned economic reports scheduled for release. We mentioned in our prior newsletter that right now the downside risk in the market was higher than the upside potential. That turned out to be true last week, and we think that still holds true for next week. It is difficult to imagine what news might come next week that would drive the market sharply higher. Our hope is that the market will recover some losses, although we do not expect a big turnaround next week. Again, the market is very shaky and further downside moves could bring panic. We believe the market will remain rocky over the next three months as the future outlook continues to 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 20% invested in our stock portfolios. We will likely sit tight on that allocation until we see more optimism and strength in the market. As the market builds strength, our stock allocation will rise over time. For now, investors should remain cautious and very selective with any investments that are made.

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