December 2009 Wrap-Up
January 19th, 2010
The broad market continued its dazzling recovery throughout December as grand predictions and a visible inability of any negative news to “stick” deepened the bulls’ convictions. Bears, on the other hand continue to walk around, dazed, trying to explain the often irrationality of market momentum. Resilient is a good description of the past month as well as the past ten months. While Economic statistics have dramatically slowed their deterioration and in many cases, shown evidence of upward trend reversal in recent months, the markets have decided and bet accordingly that the economy is just fine and will most certainly NOT see a double-dip recession. Time will tell.
From the 2009 lows in March, the major averages and sector indexes performed as follows for the remainder of 2009.
Dow 30: +61.18% Cons. Discretionary: +89.01% Healthcare: +44.45%
S&P 500: +67.23% Cons. Staples: +37.63% Industrials: +86.26%
Naz100: +78.81% Energy: +43.76% Materials +86.44%
Ru2000: +82.55% Financials: +146.95% Technology: +86.22%
Utilities: +39.74%
Several observations can be made from that magnitude of performance. An obvious one is that some major catalyst must have been put into place to not only spark but maintain that rally. Our contention is that the catalyst was widespread belief that the Fed would (and will) continue to liquefy the entire financial system. This belief further entrenched market bulls and re-affirmed the thesis that all dips are buying opportunities.
Longevity of the both the Fed’s accommodative policies and investors emboldened bullishness are question marks. One very clear data point is that investors are expecting big things from Q4 2009 earnings.
The Economy
· Final Q3 GDP came out on December 22 at +2.2%; significantly below Advanced Q3 GDP of +3.5% and Preliminary Q3 GDP of +2.8%. Several economists pointed out that revision from the second to third estimates are not commonly significant. While the general take-away was that the downward revision was “surprisingly large”, consensus for Q4 remains “around” 4%. The initial estimate for Q4 comes out on January 29.
Employment
· On January 6, ADP reported November Employment of -84,000 (est. was -75,000). This was the ninth consecutive monthly improvement in the series but also the twenty-third consecutive month of job loss.
· On January 8, the government reported Non-Farm payrolls for December at -85,000 (est. was unch’d). However, November’s surprisingly strong -11,000 jobs was revised slightly higher to show +4,000. This was the first gain in jobs in the past twenty-four months.
· Unemployment remained at 10.0%…as it was in November.
The Market
Since GDP and Employment, Dow 30 and S&P 500 are up approximately 1%, Ru2000 is up about 0.50%, and Naz 100 is flat. January window dressing has largely run its course and now investors are rolling up their proverbial sleeves to dive into earnings reports. With the major averages and sectors indexes up an additional 1%-5% since January began, expectations for strong earnings reports and guidance are presumably very high. We believe that even slightly cautious comments on forward guidance could be taken as significantly bad news by investors who have come to expect all news to be good.