Weekly Market Update - February 22, 2009

Increasing fears that the U.S. government will soon move to nationalize some of the country's largest banks drove stocks to near their November lows.  The Dow Jones Industrial Average, at 7,365, now sits nearly 200 points below its November 20 low, and many foreign stock markets reached new lows last week.  The S&P 500 is just 2% above its low, while the NASDAQ is a surprising 9% above its low.  Gold is up 10% in two weeks, demonstrating the lack of confidence on the part of investors.

We have been very cautious this year as we expected a retest of the November lows.  Given the unprecedented amount of global monetary and fiscal stimulus applied to the financial crisis and recession, we believed stocks had a good chance of holding the lows.  In fact, we have noticed several positive developments during the retest, including the lack of widespread panic selling, and many stocks outside the financial sector holding well above their November lows.  However, misguided actions by the new Administration have increased the risk of another significant decline for stocks.

At this time of crisis, investors crave more clarity and decisive action, yet the government seems to turn a deaf ear.  While Treasury Secretary Geithner outlined broad principles in his speech two weeks ago, his lack of detail led the stocks of Citigroup and Bank of America to visit the $2 level.  And after signing a $787 billion stimulus package full of pork barrel spending and entitlement programs, the President unveiled a $275 billion foreclosure prevention plan that was widely panned by observers as a waste of money and a bailout for bad behavior.

In any event, the week ahead shapes up as a critical one for the equity markets.  Should the S&P 500 break decisively below 752, the risk of an additional 10% to 20% decline becomes acute.  As a result, investors should remain defensive and prepared to further reduce equity exposure.