The Federal Reserve, Treasury Department and the SEC have collectively been more active this year than at any time since the Great Depression. Our current economic troubles pale in comparison to that dark period of American economic history; however, the concentration of turmoil within the financial system has led to significant intervention by the government intended to relieve the pressures on the financial system and with the broader economy.
The Federal Reserve has lowered interest rates, brokered the bailout of Bear Stearns and agreed to provide additional liquidity to more financial institutions than ever before. The Treasury has taken an active role in trying to save the mortgage holding behemoths of Fannie Mae (FNM) and Freddie Mac (FRE) while also encouraging Congress and the President to pass legislation designed to aid all participants of the mortgage market. The SEC joined the party fashionably late, but has been trying to regulate the actions of short sellers and market manipulators.
The pendulum has swung towards more government intervention and increased regulation. Some see the recent shift as the end of the de-regulatory environment of the past 30 years, largely attributed to the influence of the Reagan Administration. Some opponents argue that the free markets – free of regulation and interventions – are the most efficient way to achieve positive economic results.
American economic policy has vacillated between eras of more and less regulation throughout history. While increased regulations almost certainly stifle some of the economic efficiencies produced by the free market, regulation is intended to add stability to financial markets and the economy. Stability and confidence do come at a price, but it is equally difficult to argue that stability and confidence are not attributes which attract additional capital and investments. As is the case with most government policies and intervention, the debate is endless as to what degree of regulation and oversight are appropriate.
“A Tale of Two Halves” would be a good title for investors during the month of July. Over the first 15 days of the month, the S&P 500 had fallen nearly 5% as the large cap indices had fallen into bear market territory (down 20% from highs in October 2007) for the first time this year. By the end of the month, the market had regained most of those early month losses closing the month negative by 0.8%. The Dow Jones Industrial Average logged a modest gain of 0.4% for the month of July, while the NASDAQ and Russell 2000 fared better, gaining 1.5% and 3.7%, respectively. For the year, the large cap indices are all down in the 12 to 13 percent range while the small cap stocks have fared slightly better, only dropping 6% for 2008 through July 31st.
The small cap outperformance for the month and the year will be a trend to watch. Small cap stocks generally are one of the first segments of the equity markets to show improved returns in advance of an economic recovery. It has also been noted that small cap stocks have done better during some periods where elevated inflation was present. These smaller, nimbler companies oftentimes find it easier to pass on higher costs to their customers.
The financials gained an impressive 7% during the month of July. Holding out for a monthly gain with this sector was a harrowing experience, as the financials teetered on the precipice before rebounding 25% from July 15th through the 31st. Even so, the financials have still been the worst performing sector by far, producing a negative 24% return for the year through July 31st. The financials holding these recent gains will play a large part in determining whether the market has finally hit a bottom.
Coinciding with the positive shift in values of financial stock prices was a sharp correction by the commodities and the natural resource stocks. The price of oil fell $20 to $126 per barrel, which in turn sent the energy stocks reeling to a 15% decline for the month of July. Oil prices have still risen 30% for 2008, but interestingly, energy stocks, including the recent correction, have now posted a negative return of 5.7% for 2008. Stock prices of energy-related corporations and the actual energy prices on the commodity markets don’t necessarily have a perfect correlation, but it would seem that energy stocks could be attractively priced compared to an investment directly in the corresponding commodities.
Other sectors standing out during the month of July were the homebuilders (up 6.33%), REIT’s (up 2.62%) and Healthcare stocks (gaining 5.13%). Healthcare, as a group, has performed well compared to the market this year, particularly over the past several months when that sector gained 2.61% versus a decline in the S&P 500 of 8.5%. This is a marked change for healthcare stocks, which have been relatively out of favor for several years. Healthcare stocks traditionally have been seen as a less economically sensitive sector which investors would gravitate towards when the economy wavered.
The government reported that the GDP for the 2nd quarter grew at an annualized rate of 1.9%. While the figure was slightly less than the experts’ most recent expectations, it was still a fairly strong reading compared to many of the forecasts at the beginning of the year. One attribute cited by economists was trade figures, specifically growth in exports and a reduction in imports which, combined, added 2.42% to the overall rate of economic growth. The tax rebate checks also provided a positive impact as consumer spending increased at a 1.5% rate in the second quarter of 2008.
The stock market did not react favorably as the GDP data was released in part because the expectations of 2.3% growth were not met. Another common complaint of economists is that the trade improvements and gains from the government stimulus plan may not be sustainable. Some have opined that increased government spending on infrastructure projects as opposed to the tax rebates may have a longer lasting effect as jobs are created. Any additional government projects are always controversial as many opponents would rather return tax dollars to hard working Americans as, in their view, a more equitable way to stimulate the economy.
We find it difficult to find many negatives with the growth of the economy considering the challenging environment for the U.S. economy. Given that home prices have declined 15% over the past year, the problems pervading the financial institutions and historically high energy prices most would have suggested sharply lower economic activity, not growth. Economists have often pointed to any one of these singular issues as a recessionary instigator. The fact that the economy could grow, albeit at a slower rate than preferred, is somewhat remarkable. When and if the housing market and energy prices stabilize the outlook should immediately become more favorable for the economy and investors.
The Federal Reserve has lowered interest rates, brokered the bailout of Bear Stearns and agreed to provide additional liquidity to more financial institutions than ever before. The Treasury has taken an active role in trying to save the mortgage holding behemoths of Fannie Mae (FNM) and Freddie Mac (FRE) while also encouraging Congress and the President to pass legislation designed to aid all participants of the mortgage market. The SEC joined the party fashionably late, but has been trying to regulate the actions of short sellers and market manipulators.
The pendulum has swung towards more government intervention and increased regulation. Some see the recent shift as the end of the de-regulatory environment of the past 30 years, largely attributed to the influence of the Reagan Administration. Some opponents argue that the free markets – free of regulation and interventions – are the most efficient way to achieve positive economic results.
American economic policy has vacillated between eras of more and less regulation throughout history. While increased regulations almost certainly stifle some of the economic efficiencies produced by the free market, regulation is intended to add stability to financial markets and the economy. Stability and confidence do come at a price, but it is equally difficult to argue that stability and confidence are not attributes which attract additional capital and investments. As is the case with most government policies and intervention, the debate is endless as to what degree of regulation and oversight are appropriate.
“A Tale of Two Halves” would be a good title for investors during the month of July. Over the first 15 days of the month, the S&P 500 had fallen nearly 5% as the large cap indices had fallen into bear market territory (down 20% from highs in October 2007) for the first time this year. By the end of the month, the market had regained most of those early month losses closing the month negative by 0.8%. The Dow Jones Industrial Average logged a modest gain of 0.4% for the month of July, while the NASDAQ and Russell 2000 fared better, gaining 1.5% and 3.7%, respectively. For the year, the large cap indices are all down in the 12 to 13 percent range while the small cap stocks have fared slightly better, only dropping 6% for 2008 through July 31st.
The small cap outperformance for the month and the year will be a trend to watch. Small cap stocks generally are one of the first segments of the equity markets to show improved returns in advance of an economic recovery. It has also been noted that small cap stocks have done better during some periods where elevated inflation was present. These smaller, nimbler companies oftentimes find it easier to pass on higher costs to their customers.
The financials gained an impressive 7% during the month of July. Holding out for a monthly gain with this sector was a harrowing experience, as the financials teetered on the precipice before rebounding 25% from July 15th through the 31st. Even so, the financials have still been the worst performing sector by far, producing a negative 24% return for the year through July 31st. The financials holding these recent gains will play a large part in determining whether the market has finally hit a bottom.
Coinciding with the positive shift in values of financial stock prices was a sharp correction by the commodities and the natural resource stocks. The price of oil fell $20 to $126 per barrel, which in turn sent the energy stocks reeling to a 15% decline for the month of July. Oil prices have still risen 30% for 2008, but interestingly, energy stocks, including the recent correction, have now posted a negative return of 5.7% for 2008. Stock prices of energy-related corporations and the actual energy prices on the commodity markets don’t necessarily have a perfect correlation, but it would seem that energy stocks could be attractively priced compared to an investment directly in the corresponding commodities.
Other sectors standing out during the month of July were the homebuilders (up 6.33%), REIT’s (up 2.62%) and Healthcare stocks (gaining 5.13%). Healthcare, as a group, has performed well compared to the market this year, particularly over the past several months when that sector gained 2.61% versus a decline in the S&P 500 of 8.5%. This is a marked change for healthcare stocks, which have been relatively out of favor for several years. Healthcare stocks traditionally have been seen as a less economically sensitive sector which investors would gravitate towards when the economy wavered.
The government reported that the GDP for the 2nd quarter grew at an annualized rate of 1.9%. While the figure was slightly less than the experts’ most recent expectations, it was still a fairly strong reading compared to many of the forecasts at the beginning of the year. One attribute cited by economists was trade figures, specifically growth in exports and a reduction in imports which, combined, added 2.42% to the overall rate of economic growth. The tax rebate checks also provided a positive impact as consumer spending increased at a 1.5% rate in the second quarter of 2008.
The stock market did not react favorably as the GDP data was released in part because the expectations of 2.3% growth were not met. Another common complaint of economists is that the trade improvements and gains from the government stimulus plan may not be sustainable. Some have opined that increased government spending on infrastructure projects as opposed to the tax rebates may have a longer lasting effect as jobs are created. Any additional government projects are always controversial as many opponents would rather return tax dollars to hard working Americans as, in their view, a more equitable way to stimulate the economy.
We find it difficult to find many negatives with the growth of the economy considering the challenging environment for the U.S. economy. Given that home prices have declined 15% over the past year, the problems pervading the financial institutions and historically high energy prices most would have suggested sharply lower economic activity, not growth. Economists have often pointed to any one of these singular issues as a recessionary instigator. The fact that the economy could grow, albeit at a slower rate than preferred, is somewhat remarkable. When and if the housing market and energy prices stabilize the outlook should immediately become more favorable for the economy and investors.
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