Q1-09 Update

Despite a 20% rally in the last 3 weeks of March, the stock market fell 11.7% in the 1st quarter of 2009. This is the 6th consecutive quarterly decline.

Another volatile quarter was driven by investors’ changing opinions about government efforts to address the financial crisis. 2008 ended with some optimism that the new administration would be able to provide a comprehensive solution. Confidence quickly faded as rescue plans failed to live up to expectations. The fate of the country’s biggest banks seemed in doubt. In March, the Treasury department unveiled plans to buy “toxic” debt from banks and Citigroup, Bank of America, and J.P. Morgan announced profitable months in January and February.

Commodities in general were down 6.4% in the first quarter. Individual commodities such as crude oil and gold were higher. Crude oil futures rose from $45 at the end of 2008 to almost $50 by the end of March for an 11% increase. Gold was up 4.4%. Other metals and agricultural products were lower.

Home prices nationwide have now fallen about 30% from the 2006 highs. Much of the financial crisis originated with falling home values. Government purchases of mortgage backed debt and low mortgage interest rates have helped absorb the falling values. However, average prices may still have room to fall.

Retail sales moved lower in March by 1.8% after a slight increase in February.

The unemployment rate continues to push higher to 8.5% by the end of March. The recession has now claimed over 5 million jobs. There were 663,000 jobs lost in March alone and weak job market expectations remain.

The Federal Reserve maintained the 0.00% to 0.25% range for federal funds. The Fed continued to rapidly expand the quantity of funds in the monetary system through investments in Treasury debt. The yield on 10-year Treasury Notes remains very low at 2.68%. The Fed’s main concern is deflation at this point. If the economy does turn around, the focus will turn to inflation but that seems to be a secondary concern now.

Corporate earnings for the first quarter are more in the spotlight now. Expectations have been cut sharply to anticipate a 36% decline from the first quarter of 2008. If companies are finally able to meet or even exceed expectations and pronounce confidence in their ability to grow profits, we may have seen the worst of the markets. If companies anticipate continued uncertainty, we may see the markets fall again. 2009 full year estimates now call for another year-over-year decline.

Final gross domestic product growth was down 6.3% in the fourth quarter of 2008. It will likely show a decline again in the first quarter of 2009. Measures in place to influence the economy are in motion. Those impacts on economic growth should begin to show up later this year. Aggressive stimulus measures may ultimately buy enough time for the economy to turn around.

Equities all over the world dropped about 12% on average in the first quarter. There were pockets of strength as emerging economies were up slightly. With most equities down in unison over most recent quarters, this may be a sign that fears are abating and that economic recovery is forming.

Please let us know if you would like additional information on any of the above.

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