We have negative 3.8% GDP growth this quarter, which would have been -5.6%, if not for inventory builds.
People who believe in “technical analysis” point out that January often determines the course of the year. This January was the worst percentage decline in the S&P and Dow EVER.
Does anyone think we’ll see a turnaround? What’s your prediction for year-end Dow and S&P?
Lower than they are now…
I’ll bet higher. 2008 and Q4 will be complete crap, but the street has already, mostly, accounted for that. It wont take much to be expectations for '09… that said, it could be a disaster.
Lower than they are now…
I agree. It takes time for the brakes to engage. The momentum is downward in '09 and getting back up will be a like climbing a very slippery slope.
You are making an assumption that tends to fall apart in recessions – the market does not follow the economy. There is tremendous amounts of cash on the sidelines, primarily in treasuries. Assume that treasury yields fall to unattractive levels. Money managers will not hold inflows in cash for any extended period of time. When this money gets back in to the market, when there is conviction that we are at a bottom, equity prices will move up. However, this will be a stock pickers market not a rising tide floats all boats. Traders will outperform buy and hold in the short term.
I think you are right about it taking awhile for momentum to build. There has been a massive spike in unemployment, but the people who still have jobs are generally ok… for the moment. It will streadily get worse before it gets better IMO. We may see a major stock sell off if/when people need to sell assets to cover expenses. I expect company profits to suffer more as well which will send stocks downward.
I’ve only been alive for 49 years, but I’ve never seen the kind of financial lockdown we have now… not even close. I don’t recall ever seeing this big of a housing market decline or auto company decline either. And all of this on the back of escalating credit gone amuck… and then vaporizing. Not a “normal” recession…
Yes, I think this year.
We currently sit with competitive money market rates at about 0.70%. The amount in money markets is currently almost $4 trillion, a record apparently (US money fund assets rise to record $3.805 trln). As inflation continues to eat away at purchasing power, cash will lose its status and go from king to pawn. The same folks who cried “Cash is king” over the last 3 months of 2008, will replace their fear with greed and have a new slogan…… “Cash doesn’t rally”. Corporate fixed income and common stocks are simply too cheap to languish. The slightest whiff of good news is likely to send valuations higher. The big loser in this transition will be Treasury bonds. With the 10-year note currently yielding a smidge over 2%, investors will run for the exits in favor of higher returns. This market recovery will most likely take place 6-9 months BEFORE the actual economic recovery takes place. You won’t be able to time it. It may very well be tied closely to a speech about a plan and/or a seemingly minor piece of good news. It will be quick and the speed at which it occurs will surprise you. What’s preventing this recovery from taking place today is not a lack of cash but a lack of confidence and for better or worse……we mortals tend to have very short memories.
Assume that treasury yields fall to unattractive levels.
lol, do you think that a 10-year bond yielding a nominal 2.57% is attractive?
Relative to losing 8.3% a month in equities, yes. Anything with a + sign in front of it, remains attractive.
You are making an assumption that tends to fall apart in recessions – the market does not follow the economy.
Hang on. I wasn’t necessarily assuming that. I just threw it out there as a bullet point. Here are some others you might want to consider:
The equity risk premium declined for nearly three decades starting in the eighties. A reversion to the long term mean would imply much lower market valuations than the current levels.
Price to tangible book value ratios are still relatively high on a long-term historic basis.
It is now such popularly-held wisdom that the stock market will bottom before the economy, I have to wonder if it will happen this time. When everybody believes the market is going to do something, you can be sure that it won’t.
Okay, I’ll throw out a few facts of my own
Price to tangible book is currently distorted by the financial sector. Most stocks do not trade on P/TBV are banks. They trade on P/E or P/EBITDA.
Equity risk premium is largely driven by the risk free rate. Once you get inflation and the Fed raises interest rates, so to will the equity risk premium commanded. Not that this is good for stock prices.
You’ve been hitting the CNBC too hard. Based on the Fed minutes I have seen, the economy has bottomed or is near bottoming. The SMBs that I speak with feel the same.
You’re right on one thing, wrong a bit, on another.
Past performances is not an indication of future performance. In tech words, we have a markov process. All the info is contained in the price (except for folks like Warren Buffet).
The market doesn’t really follow a random walk. What drives the market are interactions between assets. There are strong and weak dependencies in the market, and understanding these is the key to understand how values change.
You and I don’t disagree. My statement was more a market theory as opposed to a reality. I don’t believe in strong form efficiency and believe there are frictions that undermine fundamental market theorms.
"Based on the Fed minutes I have seen, the economy has bottomed or is near bottoming. "
The Fed knows what the economy is going to do? And you’re ribbing me about watching CNBC?
Philosophically, I generally do believe in EMH, but I’m continually contending with the reality that my own portfolio has beaten all the market indices (S&P500, RUT, etc.) by double digits over 1, 2, 5, 10, and 15-year time frames. Just lucky I guess.
The Fed knows about the current state of the economy long before you and I do.
I’m no economist but I do subscribe to the theorim that there has been a so-called “perfect storm” of factors that have contributed to the current economic environment.
That said, it is reasonable to suggest there may be a corresponding, opposite convergence of factors. We may have experienced that already with the NASDAQ bubble a number of years ago.
In short, I would suggest we are dealing with a deficiency of economic fundamentals and perceptions simultaneously. If you look at the downturn in a number of economic factors they have been on a weak trend for nearly 18 months, followed by a roughly 90 day nose dive preceeding the elections. The flip side of that curve is a brief, dramatically positive trend followed by a slower follow-on restoration of fundamentals. This process may mirror the same duration it took to get where we are now, in other words, two years approximately.
Frankly, any recovery in less time than that may not have sturdy enough legs.
Come on man we got Obama and his cabinet of felons running the ship! Ahh fuck we’re screwed. DOW will close 12/31/09 <8200. WHich is about 1400 points less than it was when election day was and Big O got everyone convinced he can save the world!
Until the housing market hits rock bottom I am not going to start looking for the upside. There is just way to much room to fall still and people still haven’t come to terms with what has happened. This is from August on '08…
According to Zillow Q2 Homeowner Confidence Survey 62% of homeowners believe their home’s value has increased or stayed the same in the past year yet 77% of U.S. homes actually declined in value
It’s a tough reality to face. I found out today that 2 of our neighbors are almost out on the street. They had balloon loans based on the theory that house prices could only rise I guess. Ouch. Of course when they leave home my value drops again because they will go straight to foreclosure. Strange days have found us.
Its interesting in the UK that interest in Real Estate started to pick up through December and January and some of the money that was used to bail olut the banks seems to being making it to borrowers. If that is the case, then things are going to get interesting because Brown et al keep telling us the housing market needs to pick up but without a corresponding rise in values because they apparently knew that real estate was over valued.
If sales increase through the first half of this year, it may appear that the bail out has temporairily, at least, nipped this in the bud.
Interesting times.
If there is one place on the planet where real estate was over-valued, it had to be the UK…Mortgages over 60yrs, that your kids inherit??