Correction or Bear Market; Recession or Slowdown?

One of the worst January performances for the stock market is behind us and many investors are wondering just where we stand as we begin February. Are we just experiencing another correction, or are we in the throes of a full fledged bear market? While dipping close to bear levels for an hour on the Tuesday following the Martin Luther King holiday, the market has rebounded well off of those levels recently, despite much weaker than expected employment numbers. With the media and presidential candidates tossing the word recession around like a hot potato, Congress and the President brandishing a $150 billion stimulus plan and the Federal Reserve Chief slashing interest rates like a Samurai, is it any wonder main street investors are wondering what will happen next?

In a speech last week, Hillary Clinton sounded the alarm about the "second Bush recession". The media gave her a complete pass on the statement, because if my memory serves me correctly, The National Bureau of Economic Research confirmed the last recession began in the first quarter of 2001, so it is quite difficult to blame that recession on the current occupant of the White House. Furthermore, there is no confirmation of a recession at this juncture, and many economists believe the current fiscal stimulus being contemplated may well overstimulate an economy that could recover on its own from the current slowdown. So, what is the real deal?

The economy's anemic .6% growth rate for the fourth quarter does indicate a recession is a distinct possibility. A jobs number showing the economy shed 15,000 jobs also is cause for concern. With the credit crunch and housing debacle still raging, it is prudent for policymakers to manage the risk of recession proactively. However, the economic team at JP Morgan Chase recently stated that the current spate of economic stimulus being contemplated is like "risk management on steroids". Ed Yardeni, who heads his own research firm, said it succinctly in a letter to his clients when he noted, "I don't recall so much policy stimulus and so many bailout plans thrown at the economy so fast before there was compelling evidence of a recession". None of the plans being developed will have any impact on the economy in the current quarter or the second. All of the pump priming effects will be felt in the second half of the year.

If all of the doom and gloom predictions of recession turn out to be overblown, and the economy limps along with slow growth through the first half of the year, things just might improve on their own. When all of the monetary and fiscal stimulus kicks in during the second half of the year, the economy could heat up more than anticipated. The Fed could find themselves in the situation of having to raise interest rates to battle reignited inflation.

As I stated in an earlier blog, closing values of 1,252.12 in the S&P 500 and 11,331.62 in the DJIA would indicate a 20% decline for those two indices from their highs in October 2007. Until those levels are reached, we are officially only in a correction. Recessions and bear markets usually occur when most people are unaware of the possibility of their occurance. Perhaps a contrarian position might be the most prudent view to take at the present time.

John Kaighn

Jersey Benefits Advisors

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Baby It's Cold Outside

It didn't take much time for the market to hit official correction territory from its October 2007 high. After a dismal drop at the end of 2007 and two weeks of trading in the new year, the S&P 500 and the Dow Jones Industrial Average have managed to retreat to that 10% milestone. The January trading barometer, which states that the first 5 days of trading in January set the tone for the month is indicating a chilly month ahead. While the indicator, popularized in 1972 by Yale Hirsch of the Stock Trader's Almanac is quite accurate (91%) when the first five days are positive, the accuracy is only 45% when the first five days are negative. I guess it is really way to early to try to figure out what the year ahead may be bringing, although most of those participants in the Barron's Roundtable seem to think the market won't even begin to come back to life until the second half of the year.

The small nuggets of upbeat earnings news were pretty much drowned out by a continued litany of economic and financial problems. The Dow Jones Industrial Average fell 246 points, or 1.9%, to 12,606 on Friday, losing 1.5% for the week. Since the start of 2008, the Dow has now lost 658.52 points, or 5%. The S&P 500 index was off 1.4% Friday and fell 0.7% for the week. The Nasdaq Composite dropped 2% Friday for a weekly loss of 2.6%.

Fear of bankruptcy at Countrywide Financial led to a 238-point plunge in the Dow on Tuesday, followed by another big drop Friday, even as Bank of America said it would buy the troubled mortgage lender for $4 billion. A year ago, Countrywide's market value was $24 billion. Seems like Bank of America may have gotten a pretty good deal on this transaction, which will be an all stock deal.

Meanwhile, results at major financial firms are expected to continue to reflect the impact of bad bets in subprime mortgages. Citigroup is expected to report earnings on Tuesday, along with US Bancorp and State Street Corp. J.P. Morgan Chase reports on Wednesday, along with Wells Fargo Co. and Northern Trust. Washington Mutual, Merrill Lynch, Bank of New York, and PNC Financial report on Thursday.

Intel's earnings on Tuesday along with IBM's results on Thursday could also further test recent market hopes that the technology sector might continue to benefit from global growth even as the U.S. slows down. Yet, those hopes have waned in the market, with the tech-heavy Nasdaq Composite posting some of the worst losses of major indexes, losing 8% since the start of the year. Investors will also monitor the results and forecasts of industrials giant General Electric Co., which reports Friday, for clues on global growth.

Some key data will also be closely monitored next week, with investors on high alert for signs that the economy might slide into recession. Tuesday will bring reports on December producer prices, retail sales and a key business survey in the New York region. Wednesday will see the release of the December consumer price index, industrial production data, a housing market index, along with the Federal Reserve's Beige Book of economic conditions.

On Thursday, December housing starts, weekly jobless claims and the Philadelphia Fed survey will be released. Friday will bring a key consumer sentiment survey along with leading economic indicators. With oil sitting near $100 a barrel, gold topping $900 an ounce on Friday, and food prices surging, investors remain worried that inflation pressures might prevent the Fed from cutting interest rates as much as hoped. However, "the U.S. economy seems to be facing ever-greater risks of entering a recession, in the light of the latest statistics on unemployment, activity in the manufacturing sector and household confidence," said Philippe D'Arvisenet, an economist at BNP Paribas, in a note. "Under these conditions, the Fed should give priority to avoiding a recession, pushing its concerns about inflationary risks onto the backburner," he said.

I'm sure all eyes will be on the Fed at the end of the month when the Federal Open Market Committee meets. Investors are anticipating a 1/2 point cut in the Federal Funds Rate at that meeting. Unfortunately, it really doesn't seem like monetary policy will be enough to breathe life into the stock market in the short term. There are a lot of excesses which have to be wrung out of the system, and it could mean some short term pain.

John Kaighn

Jersey Benefits Advisors

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John Kaighn's Guidance Website

Markets Release Some Steam

We have been experiencing a bit of a sell off in the markets over the last few sessions. If you remember, I made a statement here recently that it wouldn't surprise me to see the S&P 500, and the markets in general, have a bit of a sell off, after the S&P broke the old record set in 2000. As you know it did break the record, and now the sell off has begun.

We have had some sizeable gains in the market this year, and as you know, the market usually never moves in a straight line up or down. Whether this is the long awaited correction, which is defined as a 10% drop, or just a pause, remains to be seen. Traders will be heading for the exits, as investors begin to hunker down and absorb the blows to their portfolios. For long term investors, diversification and dollar cost averaging should help you weather the current storm and add to positions at a discounted price. I do not think this is the beginning of a bear market, as the economy has been exhibiting signs of increased strength recently.

Have a great day and stay tuned for other helpful bulletins to keep you aware of investment, economic and market news!

John Kaighn

For more information on the markets, business marketing or online opportunities, visit my websites at

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