Don’s Outlook 1/29/10
Uncertainty continued to weigh on stocks this week. The result was the sharpest sell-off since this bull market began, causing the broader indices to lose 5% from their 16-month highs. Although much of the trouble emanated from Washington, news from China also made investors skittish. The selling subsided at the outset of this week, as investors looked to pick up attractive shares at reduced prices. After rising nearly every month since last March, stocks need to consolidate and digest the latest round of economic data, corporate earnings, and legislative agenda.
Trouble began with the election of Scott Brown in Massachusetts, which put the U.S. health care reform in jeopardy. Washington appeared to immediately digest the implications for its current legislative initiatives, as well as other policy issues such as financial reform and taxation. Without 60 Democrats, the Senate no longer had the majority to control the agenda or pass one-sided legislation.
Nevertheless, President Obama last week added to the uncertainty by announcing a proposal that, on the surface, appeared to be a sweeping pass at new bank regulation. However, it essentially lacked the details to achieve widespread support, nor did it propose a timeframe, which would allow analysts to estimate the impact of any change. Although the high probability of financial reform has been an unsettling prospect for months now, the timing and aggressiveness of the announcement still came as a surprise. The State of the Union address delivered this week mixed a defiant defense of this agenda with calls for unity among legislators.
Additional uncertainty out of Washington during the last two weeks surrounded the confirmation of Fed Chairman Ben Bernanke. Once additional senators announced their opposition to his re-election to a second term, the President reaffirmed his support, announcing that he still considers Bernanke the best person for the job. Although the chairman is battle-tested and knowledgeable about depression-era tactics to right the economy, his ability to read the tea-leaves and correct current policy were the more important questions at hand. On Thursday, Bernanke won approval from the Senate.
Actions taken by China to curb lending growth were the most important of global developments causing uncertainty. By raising reserve ratios and restricting lending outright at the most aggressive banks, China was clearly pulling in the reins. This caused ripples in all markets, but especially those trades benefiting from expansionary policies.
Please note: Although the IRS is giving most custodians until mid-February to issue their tax documents, Fidelity Investments has informed us that they applied and received approval for an additional IRS extension for their own 2009 Tax Forms. Fidelity’s new deadline for providing tax information is February 28, 2010. This may not affect all account holders, but it is best to expect a possible delay. A notification letter to those customers affected by the later deadline should be sent by February 5.
