AND THAT’S THE WEEK THAT WAS…

For the Week Ended November 7, 2008

Market Matters…         

Whatever your politics; your views on foreign policy, taxes, and the economy; your choice of candidate in this year’s election…November 4, 2008 marked an historic day as Barack Obama was elected the first African American President of the United States.  Obama inherits a domestic economy on the verge of recession (if not already in one), a global slowdown that threatens to hinder any quick recovery, and a volatile stock market that has caused even the most experienced investors to rethink their strategies.  He will not have the luxury of time to bask in the glow of victory as the American people will be looking to him to deliver on his message of hope and change.  In the days to come, he will move to appoint a (market-friendly) Treasury Secretary and turn to advisors like former Fed Chair Paul Volcker for guidance on economic issues.  Already, the US Chamber of Commerce is calling for a new stimulus package to be enacted this year (while a perceived more business-friendly Congress remains in office), and Speaker Pelosi began talking about “tax cuts” (seriously?) and some form of auto industry assistance (bailout).  With inauguration day set for January 20, Obama can get a two-month head start on the tasks at hand. 

From a market perspective, some investors remained concerned about Obama’s views on tax policy, particularly capital gains and corporate tax rates.  Some are fearful that a Democratic president and Congress could enact legislation that harms the pocketbooks of the upper class (the country’s largest investors) and attempt to push through spending packages that further inflate the budget deficit.  Others worry about the continued prospects for free trade in a global marketplace and predict that labor unions will gain power at the expense of Corporate America.  While these concerns create pessimism for the markets (even more than already exists), the optimists point out that many of these same fears resonated in 1992 when a relatively unknown Democratic President was elected and his party also controlled Congress.  The Dow Jones soared over 200% during the Bill Clinton years, the strongest performance in the post World War II era. 

With traders predicting an Obama victory, the major markets jumped by over three percent on election day and the Dow closed at a four week high.  International equities also climbed in anticipation of real “change” coming to the White House. The euphoria was short-lived, however, as the economic realities returned “the morning after.”  Domestic indexes plunged 10% over the next two sessions in volatile trading.  Cisco Systems, Time Warner, and NewsCorp became the latest companies to disappoint on quarterly earnings.  Likewise, GM and  Ford announced larger than expected losses and dismal sales results for October as execs presented a dire picture of the entire industry.  Circuit City started closing stores; Goldman Sachs began handing out pink slips; JP Morgan/Chase announced plans to modify mortgage loans for delinquent borrowers.  Weak economic releases (see below) prompted oil prices to plummet again on enhanced recession concerns; the price of gasoline pushed below $2.40/gallon to its lowest level since early 2007.  For now, inflation does not appear to be a problem.  As for the President-elect, no one ever said it would be easy.  (Then again, no one said that in 1992 either, and things turned out pretty well for the markets.)  Congratulations, good luck, and let’s get to work, Mr. President-elect. 

Weekly Economic Calendar

Welcome to office, Mr. Obama.  This past week should give you an indication about what’s in store (but there’s no turning back now).  A hectic week on the economic calendar unfortunately brought little for investors (and the President-elect) to cheer about.  The manufacturing sector appears to be in far worse shape than previously thought as the ISM index plunged to its lowest level in 26 years.  Two days later, that same ISM reported that the services sector was weakening as well.  Retailers remained very apprehensive about the holidays and the poorest October sales results since 1969 did nothing to relieve those fears.  JC Penney and Nordstrom reduced their earnings projections and only discounter Wal-Mart seemed to benefit from the uncertain times. 

As for the highly anticipated unemployment releases…In October, the country shed another 240,000 jobs, its 10th straight month of labor contraction, bringing the year-to-date total losses to 1.2 million.  Last month’s unemployment rate skyrocketed to 6.5% (from 6.1% in September) and now stands it its highest level since March 1994.  Additionally, recruiting firm Challenger Gray & Christmas reported soaring layoffs (+79%) over the past 12-months, and payroll provider ADP revealed that in October the private sector suffered its largest monthly job contraction since December 2001.  The dismal labor picture all but confirms a second consecutive quarter of negative growth (GDP), which translates into full-fledged recession.  When individuals worry about their jobs, they don’t spend.  Retailers suffer, manufacturers suffer, the overall economy suffers.  Undoubtedly, job creation will be high on Obama’s economic team’s radar screen. 

Overseas, the world’s Central Banks followed in the Federal Reserves’ footsteps by dropping their key lending rates in attempts to jumpstart their respective economies.  The ECB (European Central Bank) cut its rate by 50 bps to 3.25%, while the Bank of England took surprising action by reducing its rate by one-and-a-half percent to 3% to counter the impact of its rapidly falling housing prices and the ongoing credit crisis. 

On the Horizon…No rest for the weary as President-elect Obama transitions from the campaign trail to the White House (though just to “strategize” with President Bush for now).  With Chief of Staff Rahm Emanuel (a Clinton veteran) on board, expect Obama to move quickly to announce cabinet posts; NY Fed Prez Timothy Geithner and Lawrence Summers seem to be frontrunners for the “highly coveted” Treasury Secretary spot.  (Is Summers’ old office at Treasury still in tact?)  Retailers take center stage again (that can’t be good) as Macy’s, Nordstrom, Abercrombie & Fitch, and Wal-Mart all announce quarterly earnings.  Similarly, Starbucks reports profits next week as well as the company reveals more about its scaling back strategy.  (Don’t coffee-addicts need their morning fixes more than ever these days?)  The retail sales data for October will be released on Friday, though the recent weak sales numbers and earnings announcements should have provided more than fair foreshadowing of the actual monthly results.  The campaign has ended; the people have spoken; now the real fun begins.  Godspeed, Mr. Prez-elect. 

Brounes & Associates is a Houston-based consulting/marketing firm that performs research, marketing, and education projects for financial services companies and other professionals.  “And That’s the Week That Was” is a weekly market/economic commentary that is distributed each Friday afternoon.  Any financial professionals who have interest in rebranding the piece and sending to their investors should inquire to:

Ron Brounes

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ron@ronbrounes.com

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