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Monthly Market Monitor - April 2009

Market Indices1March ChangeYear-to-Date (3/31/09)
S&P 5008.5%-11.7%
MSCI EAFE5.9%-14.6%
Dow Jones Industrial Average7.7%-13.3%
Russell 20008.7%-15.4%

It’s All About Washington

After a dismal beginning to the month, which saw the major equity benchmarks hit a 12 year low on March 9, the equity markets staged a much needed rally. The 20%+ gains in 13 days was the fastest rebound from a bear market low since 1938.2 Gains of 20% have sometimes been signals that a new bull market was getting started. The speed and breadth of the move added more credibility for some market analysts. Others were less certain, pointing out that bull rallies of 15-20% are common in longer running bear markets and that both the Dow Industrials and Standard & Poor’s 500 had runs in that range late last year. Still, the March improvement was the best one month gain in over six years.3 Most of the market’s volatility was again attributed to news and perceptions of news from Washington. Concerns over long-term costs from the new Administration’s many programs to fix the economy were weighed against growing confidence that they could finally be useful. Most of the month’s gains were attributed to the delivery of a workable plan to get the bad loans off the banks’ balance sheets through a government partnership with private investors. This has been a key hurdle for investors seeking needed signs that the financial system could be stabilizing before stepping in to buy stocks. On the other hand, the markets did not like the proposed solution for the auto industry late in the month, feeling as if the government was taking over too much power, and took back some of their gains. The increasing need to use public money to help solve big problems continues to erode the traditional roles of government and business. With Washington asked, or forced to, do more of normally private sector decision-making, the taxpayer becomes another big shareholder to be considered. Many of the normal private-market choices, such as how much to compensate executives or when to seek bankruptcy, can get distorted short-term. Most market participants can accept short-term government interference, but worry about what it may mean for the longer-term free management of companies and the subsequent value of their stock. With many of the effects from the programs of the Administration, Treasury, FDIC and/or Federal Reserve only just beginning to kick in, Washington is expected to continue to be a major market influence, both positive and negative for some time.

Less Bad is Good for the Time Being

Some tangible benefits from the Federal programs may have helped spur the strong March rebound. Along with the applause for a public/private plan for helping banks, some analysts saw early sprouts of economic recovery showing up in the data for housing, manufacturing, consumer sentiment and retail sales. Many of these improvements just amounted to the declines being less negative over previous numbers, but getting a cluster of these signals may be the real hidden positive for the month. Even two of the major banks that had received government money said they were profitable in January and February and some have intimated they are getting close to returning bailout money. However, there have been false economic signals before and two important ones, corporate profits and jobs, are expected to show big negatives in April and remain negative for several months. Rather than expecting the markets to continue climbing like March, most analysts would be happy to see the stock market hold on to most of the recent gains over the next month or so. Many see the market rally as a sigh of relief based on early signs of returning stability, far from an “all clear” signal.

  1. Wall Street Journal, 4/1/09
  2. Wall Street Journal, 3/27/09
  3. MarketWatch, 3/31/09

Prepared by:Martin Cosgrove, CFA
Director of Investment Research
Research Department, ING Advisors Network

The views are those of Martin Cosgrove CFA, Director of Investment Research, 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.

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