Monthly Market Monitor - December 2008

Selling Pressure Continues

On the heels of the worst October in a decade, markets continued to fall in November, albeit not to the same extent as the previous month. The major indices all fell below the lows seen in October, with many reaching levels last seen over five and a half years ago. As the month ended, global stock and bond markets rallied on news of increased government involvement in the economy and possible bargain hunting. Signs of easing in the credit markets are encouraging. This provides some confidence that the latest governmental efforts, combined with past measures, will eventually establish trust among financial institutions. The original problems that sparked the crisis, falling home prices and mortgage defaults, remain a concern. In the third quarter, the S&P/Case-Shiller home price index fell 16.6% from a year earlier.² This came on top of a 15.1% drop in the second quarter.² Many analysts believe that the crisis will not reach a bottom until an equilibrium level in home prices is reached.

Near the end of the month, the government announced a plan to inject another $800 billion into credit markets. This includes $600 billion to purchase debt issued or backed by Fannie Mae, Freddie Mac, Ginnie Mae, and Federal Home Loan banks. The remaining $200 billion will be used as financing for investors buying securities tied to student loans, car loans, credit-card debt, and small-business loans. The hope is that these injections will stimulate demand for such securities, resulting in an increase in issuance of these types of debt. In a positive sign, rates on high quality 30-year mortgages immediately dropped roughly half a percentage point to about 5.5%. Lower mortgage rates are one key to improving the housing market. Despite numerous interest rate cuts by the Federal Reserve over the past year, mortgage rates had not moved lower until the recently announced government program. Some analysts have voiced concern that the large injections of cash by the government could eventually cause a significant increase in inflation. The Fed will have to monitor the situation closely and raise interest rates quickly if and when a recovery occurs. But the short term problems have to be solved first.

Transition to a New Administration

It is often said that markets don’t like uncertainty. One area of recent uncertainty pertains to the transition to a new president and his underlying administration. With the latest appointments to key positions in the cabinet, a least some element of uncertainty has been removed. Many market strategists applauded the choice of Timothy Geithner as the next Treasury secretary. He is currently the President of the Federal Reserve Bank of New York and has been intimately involved in many aspects of the government rescue plans. Thus, he will already be up to speed when he takes over in his new role. Several other key economic positions have been filled with notable figures as well. For example, Paul Volcker will head up the next panel of economic advisers. Volcker previously served as the Chairmen of the Federal Reserve under Presidents Jimmy Carter and Ronald Reagan. These new appointees will have their work cut out for them. Regardless of the steps they take, underlying economic conditions will remain weak for some time and market volatility is likely to continue.

1. Wall Street Journal, 11/29/08
2. Wall Street Journal, 11/26/08

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.

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