The economy is looking pretty weak but stocks did have their biggest weekly advance since 2003 last week.
Things are bleak in the economy:
The world’s developed economies will expand next year at the slowest pace since 1982, the International Monetary Fund (IMF) said earlier this month. Global growth will weaken to 0.5% in 2009, from 1.5% this year, sending the U.S. unemployment rate to its highest level in 16 years, the agency said.
In Canada, consumer confidence has fallen to the lowest level in 26 years, according to the Conference Board of Canada.
Consumer sentiment suffered its steepest drop on record, according to the Reuters/University of Michigan monthly survey, released Friday. Its index plunged to 57.5, down from 70.3 in September. This was far below expectations of 68, amid what the report characterized as “severe economic dislocations accelerated by fear and panic.” The Reuters/University of Michigan confidence index dates back to 1952 and set a record low at 51.7 in May 1980.
The Commerce Department said overall starts on new homes fell 6.3% to their slowest pace since January 1991 in the United States (the root cause of all the issues that “ail” credit and capital markets).
However, things are being done to fix it:
President George W. Bush defended the government’s extraordinary interventions in the financial crisis, calling them measures of “last resort that will ultimately work to restore the economy to stability.” He also stated that he “would oppose such measures under ordinary circumstances.”
On the weekend, ING Groep also received a 10 billion-Euro ($13.4 billion) lifeline from the Dutch government (stock is up 18% this morning). Credit rates and money market rates are declining in Europe and Asia which means that “credit or loans” are starting to move again.
It would be hard to imagine that we have not seen the bottom of the market yet; the Central Banks have pumped in $2 trillion to fix the various problems. These measures are going to prevent another major bankruptcy in the short-term and should put a floor on things.
Oil prices rose to $73 a barrel in Asia this morning (building on their advances from Friday) on expectations that OPEC will cut production quotas at an extraordinary meeting later this week. This meeting comes 3 weeks early – they clearly don’t like these prices.
Investors should not necessarily wait for the economy to get better or for earnings to “bounce back” before investing in a diversified portfolio.
The economy will slow and unemployment will jump. You have to be “optimistic” about future prospects although, things will remain volatile. It is very unlikely that stocks will not be able to post gains in the next 2 to 3 years based on current valuations (even within a bleak economy).
The central risk that remains will be the ‘consumer’. Consumers need to restrain spending but they also need keep spending. However, corporate profits are starting to exceed investors ‘reduced’ expectations and as long as this continues stocks will see some short-term appreciation (Ericsson, IBM, Google etc…)
Wilfred Vos Bcs, CFP, FMA, FCSI, CIM, CFA, MBA, DMS, CBV
SVP & Partner
