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Monthly Market Monitor - March 2009

Market Indices1February ChangeYear-to-Date (2/28/09)
S&P 500-10.7%-18.6%
MSCI EAFE-10.5%-19.4%
Dow Jones Industrial Average-11.2%-19.5%
Russell 2000-12.1%-22.1%

Markets fall through previous lows

Any hopes for a rebound after January’s losses were quickly dashed as both the Dow Jones Industrial Average and the S&P 500 broke through the previous lows of November 2008. Many market strategists, particularly those known as technical analysts who chart market movements, had hoped that the previous lows would hold and serve as a near term bottom. However, corporate earnings, coupled with weak outlooks for the remainder of the year, continued to disappoint investors. Worries over the soundness of the financial system as a whole also tempered any buying interest. Many analysts fear that the government will be forced to nationalize a number of large financial institutions. The current administration, however, has voiced its desire to avoid such an outcome. Ultimately, the debate will come down to the solvency of the banks and the extent to which an economic recovery and government intervention are able to stave off any nationalizations.

Stimulus bill passes

After weeks of negotiations, a $787 billion economic stimulus bill was finally passed. Some strategists believe that it is an essential element in halting the economic decline, while others are of the opinion that it will do little to actually create jobs and won’t provide the needed boost. Despite the size of the package, a bigger barrier to recovery is the large number of bad loans that remain on bank balance sheets, preventing many key banks from having the capital to make new loans. A clear proposal for the government to buy the bad loans and later sell them is seen by many as the real answer to the current crisis. One thing is certain, however, and that is that a tremendous amount of money will be flooding through the economy. It’s inevitable that analysts will disagree over the potential effectiveness of the stimulus package, but clear that something needs to be done in light of the deteriorating GDP numbers. Revised GDP figures showed a contraction of 6.2% in the fourth quarter of 2008, the worst since the first quarter of 1982.1 Consumer confidence remains near an all time low as measured by the Reuters/Michigan Surveys of Consumers. Given the January unemployment rate of 6.7%, this isn’t surprising.2 And the Federal Reserve recently predicted that the rate would rise to between 8.5% and 8.8% later this year.3

In addition to the stimulus package, the administration kicked off a new round of efforts to stem home foreclosures. It includes measures to help homeowners refinance mortgages through interest rate reductions and payment extensions. Initial cost projections are $75 billion, but many analysts expect the price tag to be much higher. As with the numerous government efforts to date, a lack of concrete details on the mortgage rescue plan, efforts to stabilize the banking system, and implementation of the stimulus package left investors wanting more. As the old saying goes, markets hate uncertainty. As long as this uncertainty continues, volatility will remain high and the ongoing flight to quality, such as U.S. Treasury bonds, will likely continue.

  1. Wall Street Journal, 2/28/09
  2. U.S. Department of Labor, 02/06/09
  3. Federal Reserve Board, 02/24/09

Prepared by:Cameron Lavey, MBA
Senior Investment Analyst
Research Department, ING Advisors Network

The views are those of Cameron Lavey, Senior Investment Analyst, Research Department/ING Advisors Network, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

All economic and performance information is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information.

Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.

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