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Monthly Market Monitor - February 2009

Market Indices1January ChangeYear-to-Date (1/30/09)
S&P 500-8.6%-8.6%
MSCI EAFE-9.9%-9.9%
Dow Jones Industrial Average-8.8%-8.8%
Russell 2000-11.2%-11.2%

Layoffs Dominate the News

Investors’ natural hopefulness from the holiday season didn’t carry too far into the new year as the reality of the economic times returned in January. Against the backdrop of additional requests for government assistance for several financial institutions, negative fourth quarter earnings releases and massive corporate layoff announcements, the global stock markets began the year with significant losses. The good news is that despite the heavy barrage of bad economic data, the major market indexes did not slip back below the old low levels of late November. Many take that as an important sign that the market had already anticipated these events and were looking past what was already accepted to be a dismal first half of the year for the economy. Most impressive to market analysts was the reaction to the unrelenting announcements of job cuts late in the month. With what may have been a one-day record of approximately 60,000 layoffs announced on January 27, the Dow Jones Industrial Index recorded slight gains for the following two days.

The gradual development of the new government’s economic stimulus package also helped build some confidence late in the month. However, more investors were impressed with signs that the center of the problem, the dysfunctional financial system, remains a focus for governmental action. As many have been pointing out for months, any stimulative actions by the Fed (monetary) or the Congress (fiscal) won’t bring long-term economic relief without improving the ability of banks to lend money. Despite the bailout money already provided, the depth of the bad loans that have to be written off continue to prevent many key banks from having the capital to make new loans. New proposals for the government to buy the bad loans and sell them later, similar to what the government did to solve the S&L crisis in the early eighties, are now seen as the real answer. Most experts still believe that any sustainable economic recovery has to start with a functioning global banking system, something that continues to elude financial experts and may still take lots of additional government money to solve.

Inflation Worries May Be Overdone

Despite signs of an extended recession, many investors worry about what the huge injection of government money will eventually mean to US and global inflation. Too much money in the system has sometimes led to rising consumer prices and higher interest rates which hurt fixed income investments. However, most economists believe that without using every tool available to solve the current “deflationary spiral” in the economy, including the government spending even larger sums, inflationary worries will be the least of the concerns for the economy. Deflationary trends can be more damaging and are much harder to turnaround than inflationary spirals. Most economists would trade some small signs of inflation now for the developing negative pattern of declining prices coming from shrinking employment and spending. The all-inclusive price index for the first quarter showed consumer inflation dropped at an annual rate of 5.5% in the fourth quarter.2 With the continuing signs of price declines in most world commodities, including oil, most experts see little sign that price increases will show up any time soon. For bond investors, investment decisions, at this point in the recession, should still be focused on quality concerns rather than higher rates from any eventual inflationary pressures.

  1. Wall Street Journal, 1/31/09
  2. MarketWatch, 1/31/09

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.

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

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