Welcome to the New Year! At this time last year, I was extremely concerned about the worsening condition of the U.S. housing and credit markets. The t...
Welcome to the New Year! At this time last year,
I was extremely concerned about the worsening condition of the U.S. housing and credit markets. The trend for both was negative.
In my editorial dated January 7, 2008, I said "...the ripple effect from the housing market may continue to spread into 2008 unless we see some stability in the credit and housing markets... the credit and housing market is not improving and could get worse. Foreclosures are at record highs across the nation and homeowners are beginning to be scared, as evidenced by the declining consumer confidence sentiment."
Well, my nervous feeling towards 2008 did pan out, as stocks nose-dived in 2008 to the point where we currently find ourselves in a nasty bear market and struggling to halt the downward slide. And what makes it even worse is that there is no solid evidence that a near-term stock market bottom is in place, since a recent multi-year bottom was broken.
In 2008, the technology sector fared the worst, with the NASDAQ losing over 40%. But the selling was across the board, with the broadly based large-cap S&P 500 down over 40% and the blue-chip DOW down 35%. The small-cap Russell 2000, a reflection of the direction of the economy, also retrenched over 38%, which is not a surprise given the slowing economy.
Clearly, 2008 was a year to forget. Given the significant decline in stocks and the extreme intraday volatility that characterized daily trading, it was a tough market in which to invest and trade. Stocks across the board fell from technology and growth stocks to blue-chip and large-cap stocks. As an investor, there was nowhere to hide and I expect much of the same in the beginning of 2009 and at least the first two quarters, until we see if the massive economic stimulus put forth begins to help.
The past year was the worst performance since the technology meltdown in 2000; yet what made this investment climate worse was the degree of the intraday volatility and the fact that numerous major global economies were also suffering from slowdowns and recessions. The linkage of world economies to each other has never been as prevalent as we are seeing today, and will in all likelihood increase, as the flow of goods and services continues.
For markets in North America, and in particular the United States, the impact from global slowing could generate more problems for the economy and stock markets in 2009.
Private non-profit research firm National Bureau of Economic Research said that the United States has been in a recession since December 2007. The U.S. GDP contracted by 0.5% in the third quarter, and we believe the contraction will continue into at least the first and second quarters of 2009. The Paris-based Organization for Economic Cooperation and Development (OECD) suggested that the current financial crisis could drive developed countries into the worst recession since the 1980s. The OECD predicts that the U.S. economy will shrink by 0.9% next year, with GDP of the 30 major market democracies contracting by 0.4% in 2009.
A report by "CFO Magazine" Global Business Outlook Survey suggested that about two-thirds of chief financial officers polled thought that the recession would extend another year. The survey, done by Duke University, has had a high accuracy rate in the past.
General Electric Company (NYSE/GE), a bellwether stock on the economy, reported that its fourth-quarter earnings would come in at the low end of its guidance.
I believe that the economic weakness will linger into 2009 due to the continued distressed housing, credit and jobs markets. There is little evidence of these key areas turning higher and, because of this, I'm hesitant to call a market reversal at this time.
In the housing market, news from homebuilders and mortgage providers remains negative, indicating that the slump will continue. Home prices are continuing to lose value, which will impact wealth. Homeowners with less equity in their homes will be hesitant to spend and this will impact economic growth. About 10% of mortgages in the United States have mortgage values greater than the market value of the property and this cannot be good. Foreclosures are already at record highs and could get worse given the declining home values. I continue to see the declining home values as a major detriment to the ability of consumers to spend in 2009.
In the credit area, analysts at Goldman Sachs issued a report that predicted banks are only about halfway through a three-year credit cycle, while suggesting the loss of home value and the worsening jobs market are to blame for the credit crisis. Given what we have seen in the financial area in 2008, with the numerous financial bailouts, it could easily get worse in 2009.
Another major area of weakness is the U.S. jobs market, which continues to see tens to hundreds of thousands of jobs disappear each month and the unemployment rate steadily rising. New first-time jobless claims were at a 26-year high in December, which further confirms the weakness of the jobs market on consumer confidence and spending. And, unless we see some positive signs in the jobs market, I believe that the economy and markets will continue to struggle.
An area that has helped has been lower oil and gasoline prices, albeit it is not a major factor at this time. The price of oil has been in a severe downward trend since hitting a record high of over $147.00 a barrel in July 2008, but recently fell to below $34.00 a barrel to a five-year low. The Organization of Petroleum Producing Countries (OPEC), which provides about 40% of the global oil supply, has been aggressively cutting its daily production to try to drive up oil prices, but it has had little effect, as oil faces a decline in global demand due to the economic slowing. The reality is that the global economic slowing and declining demand are driving oil down. I expect more cuts by OPEC going forward, but believe they will have little impact. The current trend for oil remains negative, with a lack of major support. You should stay away from energy stocks.
Stay tuned for the continuation of my forecast, tomorrow!
Profit Confidential
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