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Randall Financial Group News

31-Mar-09

2009 Q1 Market Summary

The pause markets took in December was short lived as major indexes continued to slide in the first two months of the 2009. The S&P 500 moved down an additional 25% by early March, eclipsing the lows set back in November of last year. While the decline was significant, it lacked the panicked nature of the fourth quarter. Investors seemed resigned to disappointing economic news including increasing unemployment, falling retail sales, and decreasing corporate earnings. Mid and Small cap stocks also saw declines as did developed international markets which were further hurt by a strong dollar. Not all asset classes declined however. Emerging market stocks as well as high yield bonds showed some strength while commodity prices either stabilized or gained ground.

Have we seen the bottom? It was really the tale of two quarters in the first three months of this year. January and February saw significant declines as we revisited the lows of last November. But since that time markets have been on a significant rally with the S&P up over 18% from the March 9th low to the end of the quarter. The Obama administration got off to a bit of a shaky start but several new economic initiatives seem to have somewhat calmed the markets. Positive factors in the latter half of the quarter included significant monetary and fiscal stimulus by the Fed and Treasury coupled with low inflation (see chart). Also helping are stock market valuations, which from a PE standpoint, are well below the average of the past 20 years. Existing home sales are still down significantly but show some signs of stabilizing (see chart). Additionally, new single-family home starts held steady in the first quarter and rose in many regions except for the south. This is due, in part, to monetary policy including massive purchases of US Treasury bonds by the Fed that have sent mortgage rates to all time lows. Most banks are reporting dramatic increases in both refinancing as well as purchase loans.

Low interest rates have also helped financial institutions, which have been under dramatic pressure over the past year. As the cost of money has decreased, bank lending spreads have widened, making their traditional lending activities more profitable. The balance sheets of many of these institutions have also been helped by changes in mark-to-market accounting rules that were hurting bank balance sheets. These factors have contributed to a big rally in financial stocks since the March 9th lows, with that sector up 42%. Since the beginning of April many banks, including Bank of America, Citigroup, Goldman Sachs, and Wells Fargo have reported strong earnings for the first quarter.

Despite some positive signs, we are by no means out of the woods. Retail sales remain deeply depressed, as consumers seem to have lost any interest in big-ticket items. Sales of Autos were down 2.3% in March despite a boost in unit sales due to significant discounting. Declines in Furniture, Clothing, and Electronics were also posted in March. Industrial output remains week, down 20% from Q1 of 2008. Manufacturers continue to cut back production and draw down their inventories. Until supply and demand reach equilibrium, layoffs in the manufacturing sector remain a concern. On the employment front, jobs remain very difficult to find, with the unemployment rate nationally at 8.5% and over 10% here in RI. These figures are likely to increase over the remainder of 2009 as decreases in unemployment typically lag an overall economic recovery.

Our feeling is that the panic of complete financial collapse is mostly behind us. Additionally, we are seeing indications that the dramatic pace of U.S. economic decline is easing and that some sectors such as housing may, in fact, have bottomed out. But we might be entering a new and more frustrating period, a period with tepid growth and little or no improvement in the employment sector. We have already seen a significant rebound in the stock market since the lows of early March. Whether these gains can be sustained remains unclear. And market activity remains very much at the mercy of the headlines. But as always, we are optimistic about our long-term growth prospects here and abroad. Our prudent approach to asset allocation has not been fool proof, but it has added greatly to performance relative to the stock market and we are well positioned for a recovery. We will continue to monitor the situation and keep you apprised as events unfold. Information presented here is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.

© 2009, Randall Financial Group, LLC All rights reserved. Please Visit www.Rfinancialgroup.com

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