Year 2008 saw the DOW Jones Industrial Average drop 36%, the S&P (Standard and Poor’s Index) relinquish 40.8%, and the NASDAQ Composite sink 43.1% in value.
In the 4th quarter of 2008 alone the S&P made up of mostly financial stocks has lost 26%. The DOW comprised of stocks like General Electric, American Express, IBM, Caterpillar, and Boeing lost 22%, and the NASD comprised of primarily Technology stocks lost 28%.
The DOW had its worst 4th quarter since 1987 and the NASDAQ had its worst quarter since the 3rd quarter of 2001.
An expected 2009 federal government stimulus package is creating uncertainty in the stock market. The indices have been in a very tight trading range all month. Traders and analysts favor stimulus that includes an income tax rate cut believing that this will produce immediate results for the economy and the stock market.
However, stock redemptions pegged to the $50 billion Madoff scandal are expected to effect the stock market in the first quarter of 2009. Bernard Madoff is the 70-year-old former chairman of the NASDAQ Stock Market who masterminded the $50 billion Ponzi scheme through a hedge fund he ran. In a Ponzi scheme, money is used from new investors to pay unrealized returns for the earlier investors.
US unemployment claims are at a 26-year high. As of November, Virginia was ranked 11th with an unemployment rate of 4.8% with the Roanoke Metropolitan area unemployment rate being 4.1% as of the 3rd quarter. Recently disclosed area layoffs have not been calculated into this percent. Analysts predict US unemployment in 2009 will reach 9% or higher without collapse of the automakers. All bets are off with the bankruptcy of GM, Chrysler, and/or Ford.
The Federal Reserve reduced the benchmark rate to near 0% and said they would keep it there for the foreseeable future. The hope is that this may spur mortgage refinancing that will put spending money in some homeowner’s pockets – that is if they don’t owe more than their home is currently worth. Banks that had been so free with their lending practices are now tight-fisted with their cash.
Oil that had once reached $140 a barrel was on track to break below $30 a barrel some analysts predicted. This week oil moved above $40 a barrel in response to the outbreak of violence between Israel and Hamas in the Gaza strip. Though oil speculating has waned with the weak economy there is now fear that upheaval in the Middle East could spread. Analysts worry that the oil supply could be interrupted and make a sagging economy even worse.
As usually occurs when turmoil erupts in the Middle East a flight to Treasury bonds increases prices and reduces already depressed bond yields. The 10-year Treasury bond yield of 2.08 percent now approaches the 50-year low of 2.04 percent.
With the FED pumping greenbacks into the economy like there is no tomorrow some analyst’s fear “inflation” is inevitable. Other analysts and economists fear that “deflation” is the more likely scenario. The flight to Treasury bonds seems to bare the “deflation” scenario out at least in the short term. A Goldman Sachs’ analyst predicted that growth in the second half of 2009 would “uptick” to 1%. While another analyst with Moody’s Investor Services hoped that the new administration would do whatever it takes to prevent collapse of another financial institution like Lehman Brothers.