Monthly S&P 500 Futures

Not all of the news is pessimistic. It is likely that the simulative efforts undertaken by the Federal Reserve and the Treasury will cause the downturn in the economy to be of a shorter duration than it normally would have been. After the November 21st intermediate lows were established, stock index futures were able to partially recover. A good portion of these gains can be attributed to the multitude of government plans that will establish the largest infrastructure spending effort since the early 1950s in an attempt to stimulate the economy. Late last year it was announced that there will be a new public works initiative that will increase investment in roads, bridges and public buildings. In turn, it is hoped that this will increase the nation’s employment. More recently massive new tax cuts have been proposed by Congress. In addition, there was increased optimism when it was reported that the government will help distressed mortgage borrowers by using government funds to help reduce interest rates for home loans.

However, there has been some skepticism more recently. There is a growing belief that Treasury Secretary Geithner’s financial rescue plan may not be able to get the job done along with expectations that next week’s economic reports will show continuing weakness in the economy, in spite of the myriad of government bailouts and tax cutting plans. We are seeing more signs that the current period of duress in the economy will continue through the second quarter of 2009. 


In the most recent reporting period jobless claims were 627,000, against expectations of 620,000. Recent estimates for nonfarm payrolls have been revised to show larger declines than previously estimated. January nonfarm payrolls were down 598,000, when a 540,000 decline was anticipated and the unemployment rate was 7.6%, against a guess of 7.5%. It is true that many of the bearish factors that have exerted downward pressure on stock index futures this year have taken place during previous bear markets, especially the employment situation. Keep in mind that the employment picture is a lagging indicator.


Worries remain that the various stimulus and bank bailout plans will not be enough to jump start lending as potential homebuyers continue to remain on strike. Consumers continue to have a difficult time getting credit lines and loans. It appears unlikely that this condition will be remedied anytime soon in spite of the variety of government assistance plans. Consumer spending could deteriorate even more as the problems on Wall Street move through the economy. It looks as though restrictive lending rules and further price declines will keep many buyers out of the housing market. Underscoring this problem is a report from the Federal Reserve that said a majority of U.S. banks have made it more difficult for consumers and businesses to get credit in the last three months even though financial institutions received large injections of taxpayer funds. Recent housing statistics suggest that the current housing recession is the worst since the 1930s and there is a growing feeling that there will be more problems related to the precarious housing industry within the next six to twelve months. The January housing starts report showed a drop of 16.8% to 466,000, against a guess of 530,000. Building permits were not quite as dire, coming in at 521,000, when 525,000 were anticipated. Our studies suggest that the housing market will not bottom until late in the second quarter of 2009.
 


We continue to hear reports that analysts are revising down their corporate earnings estimates for the first and second quarters of 2009.  Our own research tells us that corporate earnings will remain weaker than analysts’ estimates at least through the first half of this year. In addition, there are an increasing number of analysts that are predicting that the U.S. economy will continue to shrink in the first part of 2009. In spite of this belief it was encouraging to see the fourth quarter GDP down only 3.8% when a 5.5% drop was anticipated. Even though this number was better than expected, it should be noted that the two consecutive quarters of negative economic growth that we have experienced unfortunately meet the classic definition of a recession.


It does look as though the Obama bounce came early. More recently, futures have come under renewed selling as a result fresh concerns that the global banking system will face further pressures, including losses and ratings downgrades, as the international recession continues.

Some of the weakness can also be linked to the uncertainties of the U.S. auto industry bailout as General Motors and Chrysler are submitting restructuring plans to the federal government in order to receive emergency aid.

The big question remains: which stimulus plan will be the one that finally turns the market around?  Our experience has shown that the stimulus plan or government intervention that finally reverses a market trend is the one that takes place when the market is ready to turn around on its own. Our analysis suggests that whatever stimulus package or intervention that we have late in the second quarter will be the one that finally “works.” We can expect major buying opportunities to develop in stock index futures late in the second quarter of 2009.

If you would like more information about this article, please contact Alan at 1.800.243.2649 or email him at alan.bush@archerfinancials.com.


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