Dear Clients & Friends:
The Fourth Quarter 2008 ended with a strong equity market rally off the November lows prompting optimism that perhaps the worst of the bear market was over. As we now know, that was not the case. The equity markets resumed their decline and established a new low for the current bear cycle in early March.
We find ourselves in a similar position at the end of the First Quarter 2009. March ended with a strong rally – the best month in six years – posting 8.76% for March as measured by the S&P 500 Index. (For the quarter, the S&P 500 Index returned -11.01%.) Just as at the end of the Fourth Quarter 2008, we find ourselves asking is the worst behind us? Or will we resume the bear market decline?
Only time will tell, but cautious optimism may be more justified this time. While no one is willing to declare the bear finished or promise an end to the current recession, there are several interesting observations to be made as the first quarter concluded:
Market volatility
While market volatility was double its normal level through most of the first quarter, it is roughly half what it was during the market shocks of September and November 2008.
Changing themes
The markets and the real economy still face considerable challenges, but they are significantly different than the questions lingering over the markets three months ago. The major themes at the end of 2008 were the deflating of the housing bubble, the stability of the financial system and the clogged credit market. Concerns remain about all three, of course, but there seems to be greater clarity around these issues:
- With housing prices substantial off their peaks, it is possible to argue, as does JPMorgan's Dr. David Kelly, that the "bubble" no longer exists. Surprising housing data about increased sales and housing starts supports the idea that the worst may be over, even if prices still have room to fall.
- The Obama Administration's plan for getting "toxic" assets off bank balance sheets – and thus stabilizing the system and unclogging the credit markets – was well received by investors, as evidenced by the positive response on March 23.
Signs of economic improvement
In addition to the surprising housing data already mentioned, retail sales were better than expected, especially in January, and consumer sentiment numbers were also improving. Orders for durable goods manufacturing also exceeded analyst expectations for February. Several analysts have begun to suggest that the economy may begin to emerge from recession by the end of this year.
Government stimulus ready
The signs of improvement already mentioned manifested themselves before the government stimulus packages were complete and their impact felt. History suggests that government stimulus programs are more effective in accelerating a recovery than sparking one.
Thank you for your trust
I recognize that the bear market has been long, steep, and severe and I will continue to closely monitor the economic and market environment as well as your portfolio. While the general outlook for the next 12 to 18 months is anything but certain, there is increasing clarity and focus around the issues at hand.
While I cannot control the markets and claim no special powers of prognostication, I aim to keep you well informed about your money. If you would like more frequent updates, I encourage you to visit my blog. Otherwise, if you have specific questions and would like to discuss the current markets or your portfolio, please call me at 515-457-1222 or send me an email. Allow me the opportunity to spend time with you reviewing your financial objectives and answering any questions you may have.
1 Market Insight Series, Waiting for a Recovery, March 9, 2009 JP Morgan Asset Management
2 Source: Bloomberg
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