The Dow’s 10.88% rally was the sixth-strongest in history; unfortunately, jumps of this size only occur in bear markets – so while these moves are very nice to see, it does remind us (as if we need it) of the market we are in. We’ve got another three trading sessions to get through to put October behind us. Getting past this relatively unscathed from here may be a nice psychological boost – October has shown to be the harshest month of them all on occasion.
The broad-market’s advance almost wholly occurred in the final 90 minutes of trading. Hopefully this means something, but we’ll have to get past economic data over the next several days that will not give the investors a sense of optimism before we really know.
Market Activity for October 28, 2008
Consumer discretionary, basic material and financial stocks, the hardest hit during this tough slide, led the way yesterday soaring 13.10%, 12.65% and 12.50%, respectively. Energy also took off, as did tech – both were up more than 11%. The remaining five major sectors gained at least 7.50%.Credit Markets
Sales of longer-term commercial paper – CP -- (short-term financing with maturities of no longer than 270 days) soared 10-fold after the Federal Reserve began buying CP through its new funding facility that began Monday.
Companies sold more than 1500 issues totaling $67.1 billion compared to 340 issues at $6.7 billion last week. It’s essential that the CP starts to flow again and is an early sign that the Fed’s latest efforts to unlock the credit markets is working.
Economic Data
On the economic front, the S&P Case/Shiller Home Price Index showed values declined in the year ended in August at the fastest pace yet, falling 16.6% over the last 12 months, driven by foreclosures. For a fifth-straight month, all cities covered by this index showed a decrease in prices compared to the year-earlier period.
On a month-over-month basis, the index showed prices in the 20 cities that it covers fell 1.03%. Just two cities showed an increase in property values – Cleveland and Boston. That’s down from six cities for the July data.
We’ll point out though, as we do each month, that this index is the least broad of the three major home-price gauges and it shows by far the largest decline in prices. Case/Shiller covers just 20 metro area (yes, many are the largest cities, but it is not a broad look) and 10 of which are the worst hit areas. Washington DC, Tampa, Detroit, Minneapolis, LA, Miami, San Diego, Las Vegas, Phoenix and San Francisco are all down 15-30% over the past year.
While this index receives the most press, averaging the three major gauges shows that home prices are down 10.5% over the past year, with the less speculative areas (which is most) averaging roughly 7-8% declines over the past year.
Foreclosures will continue to put pressure on home prices, this is the pig in the python as delinquencies will rise even as housing flattens and begins to recover. But these lower prices will also foster increased sales. The issue currently though is that more traditional triggers of housing weakness (weak job market for instance) are beginning to have an affect.
It is impossible to assess when the market will turn around, but as the credit markets slowly return to normal, we may see prices flatten out by next spring/summer. And as we’ve discussed before, the dramatic decline in new homes available for sales should help prices begin a slow progression as the inventory-to-sales ratio plunges once sales bounce back.
In a separate report, the Conference Board reported their Consumer Confidence survey tumbled to the lowest reading since records began in 1967 – falling 23.4 points to 38.0. This substantial decline was the third-lowest on record, trailing only two plunges in the early 1970s.
Much of this is due to the credit-market disturbance that has sent stocks down 30% in the past month as stock-market activity has a major effect on people. The degree of the decline has gathered much press for obvious reasons, putting consumer expectations that much lower.
For instance, the proportion of people who expect their incomes to rise over the next six months dropped to 10.8% from 15.1% in September – although the number of people expecting it to remain unchanged has hardly budged over the past year – that number stands at 69%.
The percentage of consumers judging jobs as being “plentiful” fell to 8.9% in October from 12.6% in September, while those viewing jobs as “hard to get” rose to 37.2% from 32.2%. Thus, the net “plentiful”/”hard to get” index deteriorated to -28.3%, the lowest since October 1993.
We generally do not report on this confidence reading as it is a very poor indication of the direction consumer activity takes. However, this level of decline is showing the current environment is having a substantial effect, so I thought we’d discuss what occured.
This situation is going to hit the personal consumption component in the GDP report hard and the fourth-quarter reading is going to post a traditional recessionary figure – something not seen since 1990-1991. (We have yet to even get the third-quarter reading, which comes tomorrow)
We have been touching on how consumer activity will be weak for three months now, and that will certainly be the case. Prior to the past six weeks, the business side of things was shaping up to offset some of this weakness but, alas, things have changed very quickly. Everything changed when Lehman went down on September 15, and boy did it.
I guess if there is a bright side to this it certainly appears that stocks have priced this weakness in, at least regarding near-term events – and much more considering the degree of the decline, the fact that the broad market trades 30% below the 200-day moving average, dividend yields are at a 17-year highs (on the S&P 500 and NYSE Composite) and valuations regarding an abundance of individual stocks are the most attractive in many years.
The test over the next several days will be some pretty bad economic data. We’ll get durable goods orders, GDP (which will post a negative reading) and manufacturing activity – all which will show the stresses of what’s occurred in the credit markets over the past six weeks. The big one will be next Friday’s job report which will be the worst we’ve seen yet during this 10-month labor market contraction.
Of course, we’ll also have the election, which has surely weighed on the market over the past couple of months as well. I believe stocks have discounted the worst-case scenarios, but one never knows and it will be key to get through the next week without additional damage.
The Fed
Today the Fed’s two-day meeting adjourns and we’ll get their rate-cut decision, which will be either 25 or 50 basis points (bps) in the fed funds rates. Most expect a cut of 50, which will bring fed funds down to 1.00% -- we’ve seen this scene before haven’t we?
The move will be more symbolic than anything. The effective fed funds rate has spent much time below 1.00% over the past several weeks and has averaged 0.75% -- due to the massive amounts of liquidity they have pumped into the system. The last thing the FOMC wants to do right now is disappoint the market – which does expect the 50 bps point cut. I’m not saying I agree with this view, just stating they are not likely to disappoint. The decision will come at 1:15 CT.
Have a great day!
Brent Vondera, Senior Analyst
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