Financial Market UpdateStrategicPoint of View®
January 4, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
Volume was light and news was slim. Most investors stayed on the sidelines, unmoved by a decline in new unemployment claims, expanding economic activity or an increase in consumer confidence.
S&P 500: 1115 (down 1% for the week and up 23.5% for the year)
Dow: 10428 (down 1% for the week and up 18.8% for the year)
NASDAQ:2269 (down 1% for the week and up 43.9% for the year)
10-year: 3.84% (down 9.3% on the year)
Crude Oil (January): $79.67 (up 35% on the year)
Gold (February): $1095 (up 24% on the year)
USD/Euro: $1.4325 from $1.4347 (up 2.5% against the Euro on the year)
THIS WEEK
The year opens with a burst of economic data: manufacturing activity, factory orders, construction spending, consumer credit and, most importantly, on Friday the jobs report. Traders will be back in force sizing up the opportunities for a January bounce.
COMMENTARY
The Old
Out with the old and in with the new. And “good riddance” to the first decade of this century. Need we remind anyone that the stocks are down 9% (Dow), 24% (S&P) and 44% (Nasdaq) from January 1, 2000? Bonds, fortunately fared much better – up over 85% on average over the decade - balancing out many of the investor losses over the ten year period.
The Beginning
There is something about a new decade that brings hope. Maybe it is the “start over” feeling or the notion that people are eternally adaptable. You can liken the last few years to a messy, complicated, emotionally wrought divorce from our go-go past. We’ll be offered the chance for a new beginning once the papers are finally signed.
In reality, the New Year is not a line of demarcation. January 1st is an extension of December 31st, with the problems of 2008 and 2009 lingering. And the final papers aren’t signed yet. But we can look to the future with a good knowledge of the variables we are juggling and a sense of where we could end up.
The New
Panic is gone. Global economies are being propped up sufficiently to minimize the worry of another major recession/depression in our immediate future. The consensus for economic growth is muted (2-4%), but still positive. Unemployment, a sluggish housing market, reluctant consumers and the continuation of toxic assets and high leverage/debt will keep the economy from bursting out of the gate.
But there is good news as well. Improving economic conditions, low inflation, nascent business activity and a continuation of government support will keep the economy on track the first part of the year, with maybe a few pleasant surprises. Businesses are lean, the cost of capital is low and most balance sheets of large corporations have improved dramatically. If business and consumer confidence improves, spending will pick up and the economy may be able to absorb the unemployed at a faster rate than currently expected.
Ironically, good economic news could be bad for the markets in the short term. As the economy stabilizes, the Federal Reserve will be pressured to curtail its easy money policy, most notably through the increase in interest rates and ending its securities purchasing program. Not only does the Federal Reserve want to forestall inflation, but it also wants to lessen the debt burden of the US. Both can be accomplished with a tighter monetary policy.
In turn, rising interest rates can hurt the bond market (existing bond holders see the value of their bonds fall as opportunity for greater return is offered in new bonds). Stocks can also suffer, as businesses experience higher costs to financing their debt. With stocks posting their best return in six years, markets could be vulnerable to a pullback if investors become too fearful of the Fed raising rates.
But in the longer term, rate increases will be good for the markets – as they signal a strengthening economy, accompanied by a bit of inflation. A gradual increase in inflation allows businesses to raise prices and capture more profit, thereby increasing their earnings – the fuel for stock prices.
The Outlook for 2010
Overall, it should be another transition year for the economy, with markets in the first half of the year likely outperforming the second half of 2010. Determining where to invest money will be more challenging in the coming year, especially with several measures declaring stocks as currently overvalued and portfolio managers no longer needing to hold stocks to window dress their holdings.
It will become even more important to carefully select sectors and asset classes that will outperform their peers. This is true on both the equity and the fixed income side of portfolios. Neither the economy nor the markets will likely be static in 2010. There is just enough uncertainty to keep the flow of money guessing and rotating. The best strategy for dealing with uncertainty is risk management. We’ll have more on that next week. In the meantime, our advice for 2010 is for investors to stay on top of their portfolios and not become complacent.
Tune into the “Making Money” Show Weekdays at 5:30pm and Saturdays at 9am on AM790 WPRV or through our website, www.StrategicPoint.com.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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