Don’s Outlook 1/23/09
Last week the rally appeared to have ended, but we received clear confirmation this week after domestic and international markets fell further. The worst selling coincided with an historic presidential inauguration, and stocks have traded sideways from there. Economic weakness caused the initial drop in shares, and negative earnings announcements did not help either, but overall the market was in good shape until Citigroup detailed a breakup plan and Bank of America asked the Federal government for more bailout money.
On Monday, banks in the U.K. plummeted on nationalization fears, and when American markets opened on Tuesday, the financial sector plunged. State Street, the issuer behind the popular SPDR ETFs, led the market down with a 59 percent drop after the company reported higher than expected losses. The firm had been a relative outperformer before yesterday, but investors quickly lowered their expectations.
Not all companies are missing the mark, however. IBM helped the tech sector rally after it reported higher earnings and raised guidance for 2009. Northern Trust beat earnings and revenue estimates, a rare occurrence anywhere these days, but especially in the financial sector. Its conservative approach and primary focus of managing money allowed it to steer clear of the troubles plaguing the larger investment firms acting like financial supermarkets. Apple beat its estimates, but Microsoft missed its own, sending their stocks in opposite directions this morning.
The economic data continues to paint the picture of a substantial recession, but there is a good chance that the worst is behind us. Although jobless claims rose and housing starts declined this week, there were seasonal factors to account for the unemployment figures and the housing results will cut inventory and eventually support prices. Consumers are hunkering down and beginning to reduce debt and save more, but the previous quarter could still represent the worst part of the economic contraction. Their retrenchment will certainly prolong the recession, and businesses have reacted by reducing inventory and cutting investment, but what we must look for as investors is the point at which the tide shifts—the undertow might keep pulling, but it does so at a reduced rate.
Now that President Obama has assumed the Oval Office, he is fast at work coordinating a fiscal stimulus package that will go a long way to limit the downside risk of prolonged recession. The proposed package of approximately $800 billion, or roughly 5.5 percent of annualized GDP, would be the biggest since the Great Depression. What remains unclear is whether the tax stimulus will boost after-tax real income all at once or be phased in over two years. Either way the fiscal stimulus is another quiver in the fight against deeper economic and financial malaise.
Fidelity Investments has informed us that they applied and received approval for an IRS extension for 2008 Tax Forms. Their new deadline for providing tax information is March 2, 2009.
