Daily Insight

U.S. stocks ended the market’s worst year since the 1930s on a positive note, rising roughly 4% over the final two trading sessions of 2008. Wednesday’s gains may have been helped by a much-better-than expected reading on initial jobless claims, although continuing claims jumped, honing in on the high point reached during the 1981-82 recession.

More likely investors and traders were positioning for the so-called January effect, the tendency of the stock market to rise in the first week or month of January – the definition is not concrete. I don’t buy into this idea, since it seems to occur largely in up markets. In any event, positioning for the New Year is likely what drove stocks higher.


The benchmark S&P 500 declined 38.49% in 2008, resulting in the first 30% slide since the 38.59% plunge in 1937. There have been just two years that exceeded 2008’s decline -- 1931, when the S&P 500 lost 47.07% and 1937 when the index slid 38.59%. The 1931 debacle followed an 11.91% decline in 1929, a 28.48% drop in 1930 and preceded a 14.78% drop in 1932. So I wouldn’t go comparing what occurred in 2008 to the early years of the Great Depression years just yet.

Most other large annual declines in stock prices were followed by strong upside activity. The slide in 1937 was followed by a 24.55% rise in 1938. In 1974 – which we think is a more appropriate comparison -- the broad market fell 29.72% and was followed by a 31.55% surge in 1975. In 2002, the broad market lost 23.37% and was followed by a 26.38% jump in 2003, a year that kicked off the five-year bull market that saw the S&P 500 rise 77% by the time it peaked in October 2007.

That said, investors will be faced with plenty of headwinds this year. If the economy, not just domestically speaking but globally as well, does snap back and lending activity turns a bit more normal we’ll have an inflationary event on our hands as the Fed is printing dollars like mad. The Fed will then have a choice. Stamp out the inflation by raising interest rates, or ignore it for fear that higher rates will push the cost of money to levels that impede corporate profit growth. And even if the Fed doesn’t raise short term rates, one would think the long end to rise, which will affect corporate borrowing costs, and mortgage rates as well.

If inflation does not rise, it will probably mean that the banking system remains in disarray and lending has not returned to normal, which will also be a drag on equity prices.

The likely scenario, based on what is currently known, is that we will rally from these levels, but then run into some trouble a few months later as the previous concerns arise.

There are positives, however – as long-term readers know I do not enjoy this tone of pessimism.

Fed stimulus, fiscal stimulus, trillions in cash on the sidelines, very low gasoline prices and very low mortgage rates should help out. In addition, U.S. businesses are very streamlined these days; inventory levels are much lower than normal heading into recession and that will help to ease the duration of the downturn (less goods to sell off before production ramps up again) – so long as government policy mistakes don’t work against this private-sector efficiency.

But back to last year, if you thought it was a rough year for the U.S. market, it was worse for most overseas bourses. Overall, international stocks within developed markets fell 45.09%, led by a 42% decline in the Nikkei 225 (Japan). Emerging markets got hammered, losing 54.48%, led by a 72% in Russia’s main index.

Jobless Claims

The Labor Department reported initial jobless claims fell 94,000 to 492,000 in the week ended December 27. That’s a very big decline and the first time since October initial claims have moved below the 500k mark. While this decline is very welcome, most of it was likely due to the seasonal adjustment as the week covered the Christmas holiday. The unadjusted level of first-time claims fell only 2,000. Additionally, some suggested winter storms prevented people from filing. We’re not sure of the extent this may have played, possibly government offices closed down as a result.

The four-week average of claims fell 5,750 to 552,250.


Continuing claims jumped 140,000 to 4.506 million in the week ended December 20 – there is a one-week lag between initial and continuing claims data. Continuing claims are closing in on the 1982 peak, but as we’ve touched on many times now, this level of continuing claims is not nearly as bad as it was back then when payroll employment stood at 88 million; today that figure is 136 million, so that context is important. Nevertheless, this high level of claims illustrates labor market conditions are very weak.


In terms of the December payroll survey (job losses for the month), we look for another big decline, maybe another 500,000, as the previous jobless claims reading hit a 26-year high. That previous reading was for the week that corresponds with the December payroll reading – the Bureau of Labor Statistics defines as unemployed those persons who didn’t work in the week of the monthly employment report.

It’s too early to tell, but if I had to throw a guess out there, we should expect the monthly job losses to ease over the next three months. The job market lags the overall economy, so the labor market will remain weak for even after the economy rebounds (although the type of stimulus the Obama Administration will implement will give jobs a short-term boost) but we should see the degree of decline level off by late spring.

Russian Revanchism and Energy Supply Threats

The Russian economy has been hit exceptionally hard as global growth wanes, oil prices have plummeted (they’re economy is heavily dependent on oil revenue) and the ruble continues to get crushed and will very likely slide further. GDP trends will reverse, from growing 6-7% over the past few years to contraction.

As a result, the Russian populace will become increasingly perturbed and the number of demonstrations will rise. The regime has already countered by expanding the definition of treason (endangering order as they define it) and punishable by up to 20 years in prison. The riot police will be cracking down in force.

In order to take the citizens’ minds off of their eroding circumstance one should assume they’ll seek to reclaim former Soviet satellites, much like the conflict with Georgia last summer. Propaganda will increase to foment anti-American/anti-Western ideology. Further, as the WSJ pointed out last week Russian authorities have rewritten the constitution to grant the president 12-year consecutive years in office. They point out that current President Medvedev will take the fall for the ailing economic state to usher in Putin’s return.

This will likely become quite problematic and the Obama Administration will need to remain on top of things. Over the past couple of days, Russia has cut off gas supplies to Ukraine and threatens to extend this action. This does not only affect Eastern Europe but Western Europe as well. For now, natural gas supplies are well built, so this action by the Russians does not harm energy requirements in the near term, but it is a concerning indication of how Putin and Co. will roll over the next few years.

The West needs to get off of its environmental concerns and think much more logically by increasing energy production. This is serious stuff. We also need to dramatically expand nuclear energy capabilities, which is extremely clean energy production and should be embraced whether you believe in anthropogenic climate change or are more concerned from a national security perspective.

Have a great weekend!


Brent Vondera, Senior Analyst