Q4-08 Update

The stock market fell over 21% in the 4th quarter and the S&P 500 finished 2008 down 38.5%.

2008 was plagued by market turmoil as the economy entered into a recession. Declines in home prices and rising foreclosures caused creditors to fail. The bankruptcy of Lehman Brothers in mid-September reduced confidence in the global financial system. Since then economic growth around the world has stalled. The global stock market index (excluding the U.S.) declined by 47.6% in 2008.

There were few safe investments outside of U.S. Government obligations. Commodities were whipsawed as sharp spikes from 2007 and were offset by even steeper sell-offs. Crude oil futures rose from $96 at the end of 2007 to almost $150 over the summer and then back down to $45 at the end of 2008.

Home price depreciation and stock market declines have reduced consumers’ net worth and rippled through the economy in the form of declining retail sales. Lower sales and tighter corporate lending standards lead to lay-offs and cuts in capital expenditures. About 2.5 million jobs were cut in 2008 pushing the unemployment rate to 7.2% at the end of the year.

Government attempts to mitigate further chaos are ongoing. The Federal Reserve cut short term rates to a range of 0.00% to 0.25%. Staving off deflation has become a concern as the Fed has expanded the quantity of funds in the system through investments in financial institutions, auto makers, and commitments to back government agency (Fannie Mae) and other corporate obligations (AIG). The yield on 10-year Treasury Notes closed the year at a record low of 2.22%.

Corporate earnings growth rates continued to decline throughout the year. Expectations are for 2008 to show double digit declines from 2007 (which had declined 3.5% from 2006). 2009 estimates vary widely but have been moving lower. Most anticipate a decline from this year. Current conditions appropriately generate conservative forecasts.

Gross domestic product growth was negative in the second half of 2008. It will most likely continue to decline in the first quarter of 2009. Visibility is low for the remainder of 2009 as the country’s leadership changes and the measures in place to influence the economy are in motion.

Financial market conditions will continue to be volatile. The economy is a recession that will probably continue through at least the first 6 months. Aggressive stimulus measures may ultimately buy enough time for the economy to turn around.

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

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