Monday, February 04, 2008

Market Summary

Stocks sold off a bit today after a rash of broker downgrades in the financial sector. UBS downgraded the credit card issuers to sell. Wachovia got a downgrade from Merrill and JP Morgan also took a hit. The brokers were also down with Goldman Sachs and Lehman both down over 3%.

It is not surprising after the rally last week to see some profit taking. There is not a lot of economic data this week but we will be getting a lot of earnings news. About half the S&P 500 has reported already with earnings down almost 20% from last year. Excluding financials though earnings are up about 10% so the damage so far has been limited to that area.

Sentiment only improved slightly last week:

Bullish 30.1%
Bearish 48.9%
Neutral 21.1%

For now, the major stock market averages are still in short term downtrends. The economy is slowing but the data is mixed as to whether we are in a recession. There have been some weak reports (employment) and some not so weak (ISM,Durable Goods, Factory Orders).

Are we in a recession? I don't think so but frankly I don't think it matters all that much. Even if we avoid an official recession, the market has already discounted one. If I'm wrong and the economy is in recession, most of the selling has probably already happened. If I'm right, the selling was overdone and we will recover relatively quickly. If not, the recovery will take longer.

This year has been a great lesson in the wonders of diversification. Stocks have taken a beating but REITs and bonds are up for the year. The commodity indices have also performed well; the Goldman Sachs index is flat and the DJ AIG index is up. Another lesson is that predicting the future performance of any market is impossible. Who would have predicted that REITs would be up for the year?

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