Weekly Market Update - January 5, 2009

Global stock markets welcomed the new year with strong advances on the first day of 2009 trading, extending the gains achieved during the last week of 2008. The S&P 500 rose nearly 7% last week and is up 24% since the late-November bear market low. While stocks rallied, some of the shine came off U.S. Treasuries, as the 30-year bond fell 6% in just two days. This strong equity market performance continues the recent trend of investors shrugging off bad news, suggesting stocks may have fallen enough in 2008 to discount the difficult economic conditions the world is experiencing today. Of course, trading volume has been at seasonal lows, so the real test comes this week when both bullish and bearish investors return to work.

We all know the arguments for stocks to resume their bear market decline - global recession, massive deleveraging, corporate losses, etc. - but let's take a look at some positives that support stocks in the short run. First, investors put $23 billion into equity mutual funds in December after taking out a record $320 billion from all funds in 2008, suggesting that the forced selling is beginning to abate. January is typically a good month for equity fund flows, and stocks may benefit from asset allocation rebalancing. Second, the Volatility Index (or VIX) has declined by more than 50% from its November high to a recent 37, indicating that investor psychology is greatly improved. Finally, early signs have emerged that the tremendous stimulus provided by the Federal Reserve and U.S. government are helping to stabilize the credit markets. (We can debate the long term implications of these actions in future posts.) 

This week the markets will have plenty of important news to digest. Details of President-elect Obama's approximately $800 billion fiscal stimulus plan emerged over the weekend, including a projected $300 billion tax cut. The week's economic releases are highlighted by the December payroll employment report to be released on Friday. This is clearly expected to be a bleak report, with the consensus view that the economy lost 500,000 jobs last month and the unemployment rate rose to 7.0%.