Market Commentary: November 2008
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Capital Markets

October stayed true to its historical reputation and recorded the worst monthly performance thus far this year. Stalled credit markets and a clearly evident global slowdown contributed to the fear and uncertainty in the market, perpetuating the downward spiral for risk assets.

Throughout the month, the Fed worked diligently to restore liquidity and confidence back into the credit markets, and they did not work alone. In early October, an effort by central banks worldwide resulted in a coordinated rate cut of 50 basis points. The Fed ended October with an additional 50 basis-point cut, bringing the Fed Funds rate to just 1.0%. The U.S. Treasury Department, after approval of the $700 billion Emergency Economic Stabilization Act, extended the Fed’s efforts to shore up the financial system by taking a direct stake in banks. By month end, the progress of these actions was becoming apparent and volatility marginally subsided.


Source: PMFA

Domestic equities across the board suffered significant losses throughout the month. Mega caps withstood this mass sell-off to a greater degree as compared to smaller companies, consistent with their typical behavior in such an environment. International indices furthered their losses as well, now reporting declines of over 40% year-to-date. Ultimately, our expectation is for continued volatility. Downside risks still persist, as uncertainty is very high.

“Unprecedented” is a word being used with alarming frequency, yet it is all too appropriate. The volatility index, often referred to as the fear index, recently spiked to an unprecedented peak, nearly double its prior high. This volatility was witnessed at each extreme in October, which  reported the worst one-day drop for domestic equities since 1987’s “Black Monday,” followed shortly by the largest single-day rally since 1932.  

VIX - CBOE S&P Market Volatility Index – History

Source: PMFA, Bloomberg

As the Fed’s actions began to make headway in shoring up liquidity, distress in the fixed income markets began to ease. Confidence marginally improved relative to municipal bonds while remaining challenging for investment grade taxable bonds. Riskier segments of the fixed income market furthered their losses. International emerging market debt and Treasury Inflation Protected Securities fell by nearly 9% in October, while the Lehman Brothers High Yield Bond Index reported a sizeable loss of nearly 16% for the month.


Source: PMFA

The considerable weakening of global demand, coupled with an uncertain economic outlook, sent commodities significantly downward, reaching a 3½-year low as measured by the Dow Jones AIG Commodity Index. Meanwhile, REITs reported a steep loss of over 32% in October after holding up well throughout most of the year. Since the beginning of 2007, the DJ Wilshire REIT  Index has declined by nearly 50%. We continue to monitor valuations within the context of overall economic conditions to identify potential opportunities across the capital markets.


Source: PMFA

Economy

GDP

The economy contracted 0.3% in the 3rd quarter, based on the advance estimate from the Bureau of Economic Analysis. This contraction follows a strong second quarter, a result which was enhanced by the tax rebate checks which propped up consumer spending. More telling was the significant decline of over 3% in consumer spending, which remained positive throughout the last recession. Offsetting this drag were federal government spending, inventory growth, and net exports. Although the export story remained positive, the pace of growth subsided somewhat as compared with prior quarters. This would appear likely to continue as the global economy weakens furthers and the Dollar remains strong.

Real GDP & Personal Consumption – Quarterly % Change

Source: PMFA, Bureau of Economic Analysis (BEA)

Inflation

Headline inflation continued its pullback in September as compared with a year ago, as contributions from high energy costs have receded. The one-year change in the Consumer Price Index (CPI) and the Producer Price Index (PPI) fell to 4.9% and 8.7%, respectively.


Source: PMFA, BEA, Bureau of Labor Statistics (BLS)

Core indicators, which exclude food and energy, continued to tick upward in September. Both the CPI and PCE core indexes increased by 0.2% for the month. Expectations are for inflationary pressures to recede further in the near term. Longer term, the potential for rising inflation remains a concern, due to the significant amount of policy response and monetary actions by the Fed.

Inflation Indices – 12-Month % Change

Source: PMFA, BEA, BLS

Interest Rates

The Fed announced two additional rate cuts in October totaling 1.0%. The first was an intra-meeting announcement as part of a coordinated effort of various central banks to address the mounting global credit crisis. The second was announced in accordance with the Fed’s scheduled meeting on October 29.

These rate cuts leave the Fed Funds target rate at a five-year low of just 1.0%. Expectations are for another half point cut at the Fed’s next meeting on December 16. In addition to their significant monetary efforts, Fed Chairman Bernanke also provided the recommendation that further fiscal stimulus may be necessary.

Global Central Bank Target Rates - History

Source: PMFA, Bloomberg

The yield curve steepened marginally during October, with short-term yields declining while longer-term yields increased. The ten-year Treasury yield ended the month 16 basis points higher at 4.01%. Recently, the shorter end of the yield curve has experienced much more volatility as market uncertainty has remained. The three-month Treasury yield was cut in half, ending the month at just 0.46%.

Treasury Yield Curve– History

Source: PMFA, U.S. Treasury

Employment

Unemployment reached a 14-year high of 6.5% in October. Since its May 2007 trough, the unemployment rate has increased by over 2.0%. Job losses continued their downward trend, consistent with the unrelenting recent news reports of job cuts. In October alone, the nation lost 240,000 jobs. Moreover, the September estimate was revised downward to 284,000 losses, nearly double the prior estimate.

As a lagging indicator, we anticipate job losses will continue until after the broad economy has stabilized.

Non-Farm Payrolls & Unemployment Rate – Monthly

Source: PMFA, BLS

Consumer Confidence

Multiple economic indicators are now reporting significant signs of deterioration, including retail sales. Meanwhile, consumer confidence readings have reached historical lows. Like employment, consumer confidence also tends to be a lagging economic indicator, as significant upticks in market returns have followed troughs in consumer spending.

Retail Sales & Consumer Confidence – History


Source: PMFA, Bloomberg  


Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other source believed to be reliable. However, some or all information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis non-factual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.