November 2009 Market Recap
Renewed surge
· Financial markets returned to their winning ways in November.
· At 2.80 percent, third-quarter gross domestic product (GDP) was positive for the first time in five quarters, likely marking the end of the recession.
· Positive contributions came from:
o A continued rebound in manufacturing, as businesses rebuilt previously depleted inventories
o A strong resurgence in residential real estate, as buyers rushed to take advantage of the tax credit that was set to expire in November (Congress extended the credit through May 2010.)
· The Federal Reserve (the Fed) appears poised to continue its accommodative posture in hopes of prolonging the rebound.
o Some fear the Fed is being too short-sighted and that it is germinating the seeds of hyperinflation.
o But shrinking consumer credit, a lackluster employment picture, and fading consumer confidence help buttress the counterargument to that view.
· The next few weeks should provide a barometer for whether a meaningful rebound in consumption patterns is probable or if a more enduring decline is afoot.
Domestic stocks show strength
· U.S. stocks outperformed their foreign counterparts for the month, countering the year’s prevailing trend.
o The S&P 500 rallied 6 percent and is up 24.07 percent year-to-date.
o The Dow Jones Industrial Average gained 6.93 percent (21.52 percent year-to-date).
o The tech-dominated Nasdaq rose 4.86 percent (35.99 percent year-to-date).
· Small-cap stocks, often touted as the strongest performers in the early stages of a recovery, have disappointed on a relative basis. The Russell 2000 has gained a respectable 17.70 percent year-to-date, but it’s still a far cry from gains in large-cap indices.
· Stocks in developed foreign economies, as measured by the MSCI EAFE, appreciated 2.03 percent in November and are up 30.56 percent year-to-date.
· The MSCI Emerging Markets Index—the year’s runaway winner—gained 4.30 percent. It has now surged 72.20-percent higher for the year.
Renewed activity
· Renewed business investment has been a key contributor to the economic rebound.
o The ISM Manufacturing Index, a measure of domestic manufacturing activity, rose to 55.7, a four-year high and a strong indication that businesses are casting an eye toward future growth.
o We expect sustained business investment to provide a boost to GDP in the quarters ahead.
· Improvements in the housing sector also helped to fuel the rally.
o Combined sales of new and existing single-family homes have risen from a historic low of 4.8 million units in January 2009 to a more normal 6.5 million units in October.
o A stabilizing housing market could also boost GDP growth in the coming quarters.
· Long-term concerns persist, however:
o Consumers are being pressured by persistently high unemployment, sluggish income growth, and the need to pay down existing debt
o They may be less willing and less able to fuel additional consumption by increasing their debt burden.
· Consumer confidence surveys about the future fell in October and November, after drastic improvements from February through September.
· Total consumer credit outstanding (see chart) has fallen for 11 of the previous 12 months—an unprecedented phenomenon and a signal that increased borrowing may not play as big a role in consumer behavior as it has previously.
· Absent a strong rebound in consumer spending, we might need another impetus to extend the economic rally.
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