Don’s Outlook 2/20/09
As the stock market searched for a bottom this week, the major indexes have diverged somewhat. The Dow Jones Industrial Average threatened for much of the week to surpass the closing lows set in 2008, and it finally relinquished this floor on Thursday. Yet this particular index remains above its previous bear-market low established in October 2002. The Standard & Poor’s 500, on the other hand, has managed to maintain its 2008 floor despite heavy selling in the financial sector.
The backdrop for recent weakness is the reality of government initiatives recently revealed or unveiled in Washington. Investors have not been too impressed. Confidence in the Federal Reserve, President, and Congress is low and sinking. Treasury Secretary Geithner’s non-plan spurred fear, not stability. President Obama’s first major legislative effort was received with cautious optimism, because the reality is that any true spending is delayed until later in 2009 and that two-thirds of the stimulus will be focused on the years 2010 to 2012. Nevertheless, the proposal has brought additional stability for investors and, combined with other global initiatives, these measures will raise the global GDP by 2 percent. The beneficiaries include healthcare, defense, clean energy, and, above all, transportation.
Wholesale inflation numbers made headlines this week with a 0.8 percent rise, but it was mainly due to an increase in gasoline prices. Several factors have combined to raise gas prices again, but this is not expected to be permanent. A combination of environmental regulation and not-in-my-backyard attitudes from the public means refiners have a difficult time building new plants. Under normal conditions, the refiners can supply the market for gasoline. When there are fires, maintenance or other disruptions, shortages can develop. Additionally, these wholesale numbers often spike in January, as they have done each year since 2003.
Although inflation may be a few months off, it is likely to return sooner rather than later. The natural temptation during a correction or a bear market is to seek a safe place to park your money, such as moving assets to cash. This might shelter you from a fluctuating stock market, but it does not eliminate risk. The new risk you assume by moving to cash is outliving your money. If you are saving for retirement or other long-term goals, cash traditionally has failed to keep pace with rising prices, causing you to compromise your lifestyle over time. Instead, stocks have proven historically to be excellent hedges against inflation, and I have little reason to believe that this will change in the future.
