The equity markets can’t catch a break. After three straight weeks of decline, the fourth and final week seemed to be way overdue for a relief rally. After starting the week on a solid three day upswing, the market crashed on Thursday and continued to skid on Friday. The result? Although the week’s decline was modest–only 0.7% on the S&P–the total drop for the month was historic: 8.6%, the worst in the history of the S&P 500.
Why is this noteworthy? Historically, the January performance has been correlated with the entire year’s outcome more than 70% of the time. Knowing this predictive statistic, many traders and investors will be even less eager to jump in to put new money to work, increasing the likelihood of making the correlation a self-fulfilling prophesy in 2009.
What happened this week? The economic data and corporate reports were especially dismal.
On the economic front, Case-Shiller’s November 2008 data revealed that home prices fell at the fastest pace on record (since 1987). Consumer confidence dropped to another record low. Durable goods orders plunged, and continuous claims rose to 4.8 million, also a record. New home sales fell off a cliff, and Q408 personal consumption expenditures fell by more than 3% (after falling by more than 3% in Q308, this back-to-back drop is the worst showing in decades). Finally, the first estimate of Q408 GDP fell at a rate of -3.8%, the worst reading since 1982. And it would have been worse, had it not been for the huge, and unwanted, build up in inventories.
On the corporate side, the news was bleak. On Monday alone, almost 80,000 layoffs were announced, led by 20,000 from Caterpillar alone. And there was a parade of firms that either disappointed with Q4 results or Q1 outlooks. These included: Texas Instruments, AT&T, Boeing, Wells Fargo, Ford, and even Procter & Gamble.
Once again, the markets didn’t completely implode this week, in part because of the hope that the fiscal stimulus will stabilize the economy. An initial bill was passed by the House and is now being amended by the Senate. In one form or another, it Congress will pass this bill and Mr. Obama will sign it. And nobody should be surprised if the equity markets rally, perhaps significantly in February, March or April, as they anticipate a postive economic reaction to the stimulus. The question remains however: in the long run, will the stimulus actually work?
The smart money wouldn’t bet the house on it.