Market Commentary
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November 2008— Monthly Market Recap |
Posted December 4, 2008 |
Month-end rally staves off more significant losses
November continued a string of challenging months for investors, as most major equity indices finished lower. Yet things could have been worse. A market rally in the closing days of the month had investors giving a sigh of relief as the indices took back some of their losses. The Dow Jones Industrial Average (DJIA) closed down 4.86 percent, after it gained 9.73 percent in the final week of the month. The S&P 500 Index posted slightly higher losses of 7.18 percent, after increasing 12.03 percent in November's final days.
What's noteworthy about this rally is that the markets were able to move higher on little to no positive economic news. Market technicians, however, have cited a lack of volume on the upside and have expressed concerns that rallies such as this may be unsustainable until technically driven selling pressures, such as tax-loss selling, abate in early 2009. At the same time, the month brought more evidence of lingering problems in the banking sector, fueling continued investor uncertainty about the future.
A new outlook from the White House
November ushered a new party into the White House, as voters opted for Barack Obama and his platform of change. Markets appeared underwhelmed by this news, however, and traded down almost 15 percent in the two weeks following the election.
In response, President-Elect Obama began to craft what appears to be a clear vision for the future. He was quick to nominate his chief of staff, Rep. Rahm Emmanuel, and has been focused on putting together a strong and cohesive cabinet. Markets moved sharply higher on his announcement of Treasury Secretary Tim Geitner and his powerhouse team of economic advisors. The markets have also seemed to find encouragement in Obama's public statements that the economy is his main priority—and that he will have a plan in place the day he assumes office.
Additional bailout money pumped into system
Throughout the month, the markets continued to wrestle with bad news coming out of the banking system. Bailout estimates that start in the tens of billions of dollars are commonplace headlines these days. Citigroup was the latest U.S. bank to receive a government bailout, and the initial estimates were staggering. Under the Troubled Asset Relief Program (TARP), taxpayers will pony up roughly $20 billion to provide liquidity for the ailing bank, and TARP assets have been committed to support more than $300 billion in additional troubled assets. These figures will likely move higher as the government comes to grips with the scope of Citigroup's balance sheet impairment, which stems from its exposure to toxic securities.
Also seeking capital to the tune of $25 billion was the beleaguered auto industry. While its initial bailout request was rebuffed by Congress, it is likely only a matter of time before lawmakers capitulate and provide capital essential for the automakers' survival. Based on their current financial predicament, it is likely that Washington will need to supply significantly more capital to the automakers in the hope of preserving the industry and its high-quality manufacturing jobs.
The Federal Reserve (the Fed) and the Treasury announced further intervention in November, despite previous assurances that they would leave future actions up to the new administration. During the month, the Fed announced that it would no longer use TARP to buy troubled assets and would instead focus on equity infusions and other measures to shore up banks. It also announced an $800 billion plan to help revive loans to consumers and small businesses, focusing on mortgage securities, student loans, and car financing. These efforts are designed to ease credit market woes by stimulating lending by banks that have significantly curtailed their lending programs. The lending problem has been exacerbated by a freeze-up in the commercial paper market, which continued to hinder short-term market liquidity.
Borrowing costs rise, leading to some fixed income losses
The borrowing environment is still one of the most challenging, and the availability of capital is at an all-time low. This can be seen in the yield premiums to U.S. Treasuries that companies need to pay to borrow money, better known as spreads. High-grade corporate spreads are the widest they have been since 1988, when data tracking first started—standing at 550 basis points (bps), according to Barclays Capital. High-yield debt spreads are more than 1,800 bps, making the cost of borrowing for these companies prohibitive at more than 21 percent.
Because prices move inversely to yields, investments in credit-sensitive fixed income have continued to fall, resulting in further losses for fixed income investors with any exposure to credit. Investors continued to seek the perceived safety of U.S. Treasuries, although with such low yields, it appears there is little value left in buying Treasury securities.
The recession is official
Cutting through all the noise was economic news that continued to point to a worsening U.S. and global economy. House prices are still under pressure, and sales of homes declined by 3.2 percent in November. The third quarter gross domestic product (GDP) was revised lower, showing that the economy contracted by 0.5 percent over the period. With the fourth quarter likely to contract further, there's no doubt that we are in a recession. In fact, at the time of this writing, the National Bureau of Economic Research (NBER) announced that the U.S. recession began last December.
All of this has pushed the unemployment rate up to 6.5 percent, and further job losses are likely as businesses tighten their purse strings. Retail sales show evidence of purse-string tightening among consumers as well, as retail sales dropped 2.8 percent in November and consumer confidence was at its lowest level since tracking began.
Not a time for retreat, but for prudent decisions
Despite the current environment and the negative sentiment, there needs to be some consideration given to the argument that the worst is all but here, if not right around the corner. We believe that unemployment will peak in the near future, and we'll get some closure with the inauguration of our new president. Moreover, although no one can predict the future, the markets have recovered before—and, historically, they have typically begun to rebound before the official end of a recession. According to the aforementioned NBER data, we are already 12 months into the current recession.
We believe this is not a time to retreat from markets; rather, it is a time to make prudent decisions to maximize the likelihood of your success. Investors should consider rebalancing their portfolios as markets move lower to take advantage of opportunities to buy equities at lower prices. In addition, investors should wait for the market to rebound before adjusting their risk tolerances to help promote selling into strength. These are tried-and-true techniques that we believe can help to reinflate portfolio valuations once we move beyond the current slowdown.
- John Blood, CFA, Chief Market Strategist, Commonwealth Financial Network
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Disclosure:
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. |
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Please contact us with your questions or to schedule a consultation:
Canby Financial Advisors
3 Tech Circle
Natick, MA 01760
(508) 655-5355
info@canbyfinancial.com
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