Don’s Outlook 12/26/08
Light trading surrounding the Christmas holiday has the indexes treading water this week. The S&P 500 Index opens today with a 2.22 percent loss since last Friday, while the Dow Jones Industrials Average trades 1.79 percent below the previous Friday’s close.
Economic news was mixed on Tuesday, when GDP and consumer confidence figures were released. The U.S. economy contracted at annualized rate of 0.5 percent in the third quarter?a mild decline overall, but economic indicators imply the contraction accelerated in the month of September. Consumer confidence was more encouraging; the survey reported a nearly 5 point increase from November?s reading of 55.3 to December?s reading of 60.1.
The rise in consumer confidence is a good sign that the economy is making its way through the recession. Consumers initially pull back from spending due to fear and lower wages, but as prices fall faster, confidence is slowly restored. Confidence may climb higher into the New Year, as retailers liquidate inventory and send prices lower. The best deals may come from the automakers because various bailouts around the globe have maintained production levels above their natural rate, given economic conditions. Cars are piling up at ports and manufacturers will face increasing pressure to move their inventory.
Falling prices make consumption more attractive, but it?s important to remember that one of the biggest markdowns in history has already taken place in the stock market. Competition for scarce dollars will be intense, but investors who take the opportunity to purchase depreciated assets will be rewarded in future.
Bond prices have also been marked down substantially. For example, Fidelity Investment Grade Bond (FBNDX) currently yields over 6.5 percent and Fidelity High Income Fund (SPHIX) is yielding over 10 percent. The chances of price appreciation in these areas over the next year are very good, especially when investors in government bonds and money market funds decide that 0 percent is an unacceptable return. Also, Federal Reserve policy will now target long term interest rates, and capital will eventually spill into these sectors.
With the approach of the New Year, I would like to remind eligible clients to put their 2009 IRA contributions to work as early as possible. The best time to invest is when prices are low.
