We Were Wrong

By David B. Armstrong, CFA | Sep 28, 2010 | Weekly Market Commentary

Well, no sooner than we say that the Bush tax cuts will be extended, we learn that they will not be extended until after the election.  There’s a good chance that a deal won’t be cut in a lame duck session either, so a temporary expiration is possible at this point.  However, there is some good news.

We still think it is very likely that most, if not all, of the Bush tax cuts will be extended – eventually.  Additionally, there was some news surrounding the Fed’s development of the future “quantitative easing” otherwise referred to as “QE2.” It shocked no one here at Monument Wealth Management that the stock market rallied on the news of QE2 as a sign that the Fed is moving towards more stimulus.

This is now the fourth week in a row in which the equity market has increased –with a +9% rally overall.  The Dow Jones Industrial Average (DJIA) gained 2.38% to finish the week at 10,860, the S&P 500 Index gained 2.05% to finish at 1,149 and the Nasdaq Composite Index gained 2.83% to finish at 2,381.  The Russell 2000, which measures smaller capitalization stocks, also gained 3% to finish at 671.

In other news, the National Bureau of Economic Research announced – more than a full year later – that the recession officially ended in June of 2009.  The final report found that this was the longest recession since the Great Depression and destroyed 7 million jobs.

Inflation remains subdued for now and we do not expect to see this change until we see serious wage growth and industries operating their factories at a rate higher than their current 75% capacity.  Additionally, it’s hard to expect a spike in the prices of goods or services when the employment rate is still close to 10%.   At the same time, deflation (falling prices) has not seemed to rear its ugly head either.

It’s clear to us that the downside risks to the economy seem to have eased over the past month – as we expected.  The news seems to have fewer people predicting the dreaded, “double-dip recession” than we heard in July.  According to Goldman Sachs, they put the odds of a recession at 25% to 30% and think that the biggest risk comes over the next six to nine months.  We acknowledge that the economy is moving forward in fits and spurts, but it’s moving forward.

No one likes a stop and go traffic jam, but at least traffic is moving.  We still suspect to see GDP growth of 1% to 2% for the second half of 2010 and an improvement to 2% to 3% in 2011.  By 2011, we hope that the problems caused by corporate and consumer deleveraging (paying down their debt) and their unwillingness to spend will have passed and we will see continued confidence and GDP growth hit the 2-3% range.

Please call us if you have any questions.

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**Standard Compliance Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.  Stock investing involves risk including loss of principal.  The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index.  The Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.