The first quarter of 2009 ended with a glimmer of hope that the worst is over for stock market investors, as the S&P 500 Index rallied 17.9% from its bear market low set on March 9, 2009. For the month of March, the S&P 500 gained 8.8%, making it the third best March on record. However, it was not enough to save the quarter, as the S&P 500 lost 11.0% for the first three months of 2009. Most of the first quarter records for the S&P 500 Index were set for negative performance:
- January’s loss of 8.4% was the worst January ever.
- February’s loss of 10.7% was the second worst February ever.
- The first two months’ cumulative loss of 18.2% was the worst ever.
- The first quarter loss of 11.0% was the worst since 1939.
- The first quarter produced the sixth consecutive quarterly loss, resulting in a cumulative loss of 45.8%. The last time stocks fell for six quarters in a row was 1970.
The table below shows returns for various time periods.
click to enlarge
Many factors drove the market lower during the first quarter. Fourth quarter 2008 corporate earnings, reported in January and February, were generally weaker than expected. In addition, many companies were forced to slash their dividends to conserve cash. The economy continued to deteriorate with most experts revising their forecasts downward. The Obama administration’s budget, which called for increased spending and a steadily growing deficit, was poorly received by the financial markets. And while the global financial system was no longer on the brink of collapse, the repeated injection of capital into major financial firms raised the question of bank nationalization as the ultimate solution to the financial crisis. At its low point, the S&P Financial Sector Index had fallen 84% from its February 2007 peak.
In its initial efforts to get its budget and stimulus package passed, the Obama administration raised the specter of another Great Depression if aggressive actions were not taken. The message was apparently taken to heart by many. A CNN/Opinion Research survey released in March indicated that 45% of Americans believed that the U.S. will enter another Great Depression within the next year. Stock market investors reacted negatively to concerns over a possible depression as well as the prospects for increased deficit spending and greater government involvement in the economy.
The Dow gives up 12 years of performance – believe it or not – a positive indicator
On March 2, 2009 the Dow Jones Industrial Average closed at 6763, its lowest level since February 5, 1997. According to JP Morgan Chase, this marked only the third time since the index was created in 1896 that the Dow had retraced 12 years of performance. The other two times signified a close proximity to a market bottom. The first occurred on April 8, 1932, approximately three months before the market finally bottomed. The second instance was on December 6, 1974, this time marking the exact day that the market bottomed. This bear market reached its low point on March 9, 2009 at 6547. Hopefully, this indicator works again and we will not see a new bear market low. The Dow closed the quarter at 7609.
Fixed income markets reflect economic uncertainty
Interest rates for government securities remained near historic lows as investors regarded these assets as safe havens in a global economic crisis. At the end of the quarter, the yield on the benchmark 10-year Treasury stood at 2.7%. In contrast, yields on corporate bonds continued to rise as earnings and balance sheets weakened. The LB Aggregate Bond Index, which reflects the entire taxable bond market, was essentially flat for the first quarter, generating very modest returns of 0.1%. Many credit markets remained dysfunctional as risk-adverse inventors showed little interest in lower-rated corporate bonds or securitized debt.
Signs of a turnaround
The end of the end quarter rally was sparked by several indications that the economy was hitting bottom and possibly beginning its recovery. Citigroup reported that it was profitable for the first two months of the year. Several other banks followed with similar comments. The Treasury Department announced a plan to help get toxic assets off the books of banks, which was positively viewed by the market. Retail sales and housing data showed some surprising signs of improvement. Several large acquisitions were announced (including major drug companies, Wyeth and Schering Plough), providing a sign that corporate buyers were looking to take advantage of market weakness. An important account rule was changed to allow financial institutions greater flexibility in assigning a value to distressed and illiquid assets.
Although investor sentiment improved as the quarter ended, as always, it is impossible to say for sure if a new bull market has begun. Corporate earnings announcements this quarter will be closely scrutinized for indications of a turnaround in the near future. While it is difficult to identify the exact market bottom, the principal positive for long-term equity investors is that stocks remain very inexpensive based on future earnings potential. A strong recovery in market value should occur as the economy begins to recover.