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After a relatively upbeat start to November, renewed uncertainty surrounding the government's rescue plans, as well as a confluence of worrying economic news, dragged the market lower in recent days. Yet even amid those unsettled conditions, a bright spot may have revealed itself to those watching closely.
Stock markets staged a drastic midday reversal on Thursday, November 13, with the S&P finishing the day higher by 6.92 percent.
The sudden turnaround is noteworthy:
- It occurred close to the price levels from which the recent bull market began in March 2003.
- It marks the second time prices have fallen close to the 2003 lows, only to sharply reverse and move higher, without any accompanying and explanatory good news.
- It could represent a signal that investors have overshot the mark in their pessimism, and that stock valuations have already priced in a worst-case scenario.
Key developments:
- Housing market
- Nearly 280,000 homeowners nationwide received a foreclosure filing in October—a 5-percent increase over September.
- In response, major lenders initiated programs to more proactively assist troubled borrowers and stem the ever-growing number of foreclosures.
- Sales of existing homes rose by 5.5 percent in September over the previous month—a hopeful sign that prices have fallen enough to lure qualified buyers from the sidelines.
- FDIC
- Unveiled a proposal to use an estimated $24.4 billion of the $700 billion rescue package to modify mortgages for delinquent borrowers who qualify for the program.
- To provide some incentive and protection to lenders, the government would agree to share in the losses for any borrowers who subsequently fell delinquent again after receiving the initial modification.
- The plan has drawn some early support from Congress but has also raised some eyebrows, as it does not seem to offer much relief to owners whose homes are now worth less than the amount owed.
- On November 12, Treasury Secretary Henry Paulson addressed concerns that the Treasury's use of funds from the Troubled Asset Relief Program (TARP) had deviated from its initial intent.
- The chosen implementation—to make direct equity investments in nine of the nation's largest banks, as opposed to creating an auction process through which it would buy illiquid assets from those banks—appears to be a more targeted, direct, and streamlined approach than the original proposal.
- To date, the move appears to have helped restore confidence in the financial system and improve short-term borrowing conditions.
- Secretary Paulson reiterated that the three primary goals for any subsequent policy actions will remain:
- Strengthening the capital positions of financial institutions
- Supporting the normal functioning of other securitization activities crucial to the broader economy—such as credit cards, student loans, and auto loans
- Providing support to the housing market by stemming the tide of mortgage foreclosures
- Consumers facing foreclosures, job losses, and loan delinquencies are unlikely to spend.
- Retail sales in the U.S. fell by 2.8 percent in October—a record monthly decline.
- Sales at bars and restaurants, which increased by 0.3 percent, were a bright spot.
- Employment results:
- October payrolls fell by 240,000 jobs, worse than many had expected.
- The initially released estimate for September was revised to a deeper loss of 284,000 jobs for that month.
- The U.S. economy has shed 1.18 million jobs in 2008, and payrolls have now fallen for 10 consecutive months.
- The unemployment rate now stands at a 14-year high of 6.5 percent.
- Conditions abroad are equally, if not more, glum
- Ireland was the first country in the Eurozone to meet the common definition of a recession.
- Other European economies have followed suit.
Bad news...and more bad news
On one hand, there have been very few welcome developments on the economic front recently. On the other, more optimistic hand, stock indices have remained somewhat resilient. When continued bad news fails to push stock prices lower, the potential is that the actual news cannot be any worse than the future expectations already priced into the market. While it's impossible to say with any certainty exactly when the bottom will come, there are at least some signs that there's a lot of bad news already baked into this cake.
- By John Blood, CFA, Chief Market Strategist, Commonwealth Financial Network
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 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.
© Copyright 2008 Commonwealth Financial Network
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