By: SEI Investment Management Unit

New Year, New Hope, Same Worries

The Markets

US Equity markets rebounded on Friday from early losses that came on the heels of more bad news from the banking sector, and ended a rough week on a positive note. Prior to Thursday, stocks had fallen sharply, more than wiping out gains at the start of the year. It was a volatile first two weeks of trading in 2009, during which the S&P 500 lost more than 9% following a solid 3% start January 2nd.
Oil prices pulled back, falling more than 20% the past two weeks to close at $36.51 per barrel, 60% lower than this time last year. The dramatic pullback in energy prices continues to be one of the few economic bright spots for consumers.
For the week,the S&P 500 fell5.9%(-4.5%ytd), the Dow Jones Industrial Average fell 5.6% (-3.7%ytd) and the NASDAQ Composite lost 3.0%(-2.7%ytd).
Hopes for reduced volatility in the New Year were dashed early on as the equity market roller coaster ride continued. So far duringthe11 trading days in2009, the S&P 500 has closed plus or minus 2% 5 days.
The US banking crisis continued to unfold as BankAmericaacknowledged previously undisclosed losses associated with its Merrill Lynch acquisition. To that end, the US Treasury announced that it will inject $15 billion into the company. Meanwhile, a struggling Citigroup announced plans to reduce its size by as much as a third, spinning off Smith Barney and abandoning two of its consumer finance units and private label credit card operations.
On the political front, House Democrats unveiled their stimulus package, a massive $825 billion plan, including $550 billion in new spending, and $275 billion in tax relief. This represents one of the largest pieces of government spending in US history, with an estimated cost of 3% of GDP over two years, according to the Wall Street Journal.

In fixedincome markets, the yield on 2-Year Treasuries ended the week at just 0.8%, flat with last week, but 190bps below this time last year. The yield on the 10-Year Note rose 24bps this week to 2.48%, down 137bps from last year. Meanwhile, T-bills continue to yield close to 0, with the 13-week bill at 0.12% (3.16% last year) and the 26-week bill at 0.29% (2.95%).

International Markets

Overall, foreign marketshave also started 2009 on the downside, giving back the gains achieved the last week of 2008 and first week of 2009. During the past week, the DJ Euro Stoxx 50 Index fell 7.2%(-2% ytd), the German DAX lost 8.7% (-9.2% ytd), the U.K. FTSE 100 fell 6.8%(-6.5%ytd), and the French CAC 40 Index lost 8.6%(-6.3% ytd).In Japan, the Nikkei 225 fell 6.9% (-7.1% ytd),while in Hong Kong, the Hang Seng fell 7.8% (-7.9%ytd). In Latin American markets,the Mexican IPCfell 6.5% (-9.2%ytd)whilethe Brazilian Bovespa lost 5.4%.

The Concerns Are…

US Retail sales fell 2.7% in December, significantly worse than the -1.2% consensus estimate. This came on the heels of a 2.1% decline in November. For ex-automobiles and gasoline, the decline was a more palatable 1.5% drop; but, clearly US consumers are still buckling down.
Foreign trade dropped 18% from July to November as measured by combined imports to and exports by the US.Meanwhile, other major economies have suffered as well, with Japan’s exports dropping 27% year-over-year in November—the largest recorded decline. Clearly, the contraction in trade is yet another sign of a deepening global recession.
The US unemployment rate rose 0.4%, to 7.2%, exceeding the 7.0% consensus estimate and representing the highest rate in 15 years. The change in non-farm payrolls also surprised to the negative side, falling 524K versus the 500K consensus. This ended a brutal 2008, during which 2.6 million jobs were lost, more than a third coming in the final two months of the year as job losses accelerated.

On the Bright Side

US wholesale prices fell for the fifth straight month as producer prices fell another 1.9% in December, primarily driven by falling energy prices.This is not purely good news as deflation remains a threat. However, the government and Fed are doing all they can to avert a deflationary environment through fiscal and monetary stimulus.
While US Construction spending fell 0.6% in November, this was considerably better than the -1.3% consensus estimate.
The University of Michigan Consumer Sentiment Index registered 61.9, above the 59.0 consensus, and at the high end of the expected range. Clearly, one of the first steps toward increased economic activity is for consumers to feelmore confident.

Most Over-Reported and Poorly Interpreted Headline of the Past Two Weeks

There’s little doubt given the state of the economy and markets, that we are currently in a negative news cycle, in which the headlines typically convey only bad news. There’s plenty of it these days; but occasionally, mass media does not present the whole story, or misinterprets the data. Below is the latest example:

The employment data that hit the airwaves on Friday, January 9th was not good. In fact, the announcement that 2.6 million US jobs were lost during 2008 was likely followed by the statement that this was the largest number of jobs lost since 1945’s 2.75 million. What was not reported, however, was the apples to oranges nature of this comparison. A simple look into the data would have revealed that the total size of the civilian workforce in 1945 was 53 million, while it was 146 million at the end of 2007. Not exactly comparable, and while the data was not positive, the comparison was contextually inaccurate. The result was more negative news brought on by irresponsible journalism, which only serves to fuel panic, pessimism and fear that is running rampant, and in some ways may hamper an economic recovery.

On the Economic Calendar the next Two Weeks

January 21st

MBA Purchase Applications

Redbook

Nat’l Association of Home Builders housing market index

January 22nd

Housing Starts

Jobless Claims

January 26th

Existing Home Sales

Leading Indicators

January 27th

FOMC Meeting

S&P Case-Shiller home price index

Conference Board Consumer Confidence

January 28th

FOMC Rate Announcement

MBA Purchase Applications

January 29th

Durable Goods Orders

Jobless Claims

New Home Sales

January 30th

GDP

Jobless Claims

University of Michigan Consumer Sentiment Index

The Bottom Line

While 2009 seems to be off to an inauspicious start, there are some signs of hope. The credit markets appear to running more smoothly, which is arguably one of the most important factors in paving the way for a recovery. The declines in mortgage rates and energy prices are also positives for consumers. Ultimately, however, confidence is what will re-start this economy. Once consumers begin to feel that they can afford dinner out, a family vacation, or a new car; once they feel that perhaps their job is not in jeopardy, and that it’s ok to re-start their 401K contributions or invest some of their sidelined cash into the markets, we will see signs of recovery. In all likelihood, this will not be a quick process, and there will be more bad news to contend with along the way. But when, in our history, has that not been the case?

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