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The Worst Is Yet To Come: “sharp rallies off the lows – followed by sharp declines right back down”

By JC | January 6, 2009

It hasn’t been long since 2009 started and predictions for the year are well underway and all over the place. Just last month, the New York Times published an article titled “The Worst Is Yet To Come: Anonymous Banker Weighs In On The Coming Credit Card Debacle,” which has not been the end of articles reminding us that the Christmas rally we are enjoying might very well be a memory soon enough. 

Surely the credit markets for corporations has been in the center stage in the past couple of months and caused a lot of trouble for the economy. However, the core crisis, housing, seems to be causing more problems in other areas and consumer credit might become a serious one soon. A couple weeks ago JP Morgan Chase (JPM), Bank of America (BAC), and American Express (AXP) were all telling the same story: The number of late payments and defaults is increasing at an alarming rate. With the massive rise in unemployment numbers and the low income many people make, the consumer situation looks bad.

Unfortunately credit is a double edged sword; if used properly in good times you can multiply the money you make. It helps finance companies and consumers and makes our life much easier. However, because credit was too easy to get, many people began to purchase what they couldn’t afford. By increasing the demand for products and services, prices increase, and in the case of housing, prices rose to a level which was not sustainable. What the market is now facing is a de-leveraging of the system. People cannot get the credit they use to before, causing demand for goods and services to falter. Furthermore, because there is less spending in the economy, profits for corporations are dropping and causing people to earn less and hence spend less.

Current efforts by the government and the drop in prices of many commodities, especially oil, are likely to help limit the fall but these new issues like consumer debt are likely to continue to hurt the economy and growth. We could start to experience new aftershocks from these concerns. Because of how interconnected the world is, the problems that are arising in foreign countries are likely to hurt exports and foreign investment. Also, many US corporations’ revenue is coming from abroad and the fact that this is looking more like an international recession is likely to weight even more on corporate earnings. Expectations for a pickup in earnings or employment are looking at mid 2009 or the third quarter at the earliest. This is consistent with what other people have mentioned like Bank of American’s CEO Ken Lewis.

Another recent article in the Motley Fool agrees that things are just too good to be true. John Rosevear asks his readers to consider the following:

  • Reality — and more pessimism about the economy — may set in after the Obama administration takes office and optimism gives way to the sober understanding that the new team’s economic solutions will take time to work, and will be expensive.
  • Along the same lines, the recession has hit Wall Street and the upper echelons of corporate America very hard, but the serious pain is just starting to filter down to Main Street. That process will intensify over the next few months.
  • Past bear markets have been marked by sharp rallies off the lows — followed by sharp declines right back down. The true end of a bear market is typically marked by a point of maximum fear. That’s when it seems like everyone’s throwing in the towel, and when there’s little talk of bargain-hunting.

The first two points shouldn’t come as a big surprise to investors. The past week has dumbfounded many as economic news continue to show a deteriorating environment while the market continues to move higher. The second point is well covered earlier in this article. What Investors should focus now is on the third point: “Past bear markets have been marked by sharp rallies off the lows — followed by sharp declines right back down.” No one can say for certain when a bottom has occurred and what in fact awaits investors, but jumping into the buying wagon without too much thought could prove to be a foolish move.

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Topics: Market Commentary | 1 Comment »

One Response to “The Worst Is Yet To Come: “sharp rallies off the lows – followed by sharp declines right back down””

  1. Mike Says:
    January 8th, 2009 at 6:50 pm

    It’d be interesting for a review of the differnt lifecycle funds from the big companies (e.g., Vanguard, T. Rowe Price, etc.) Review how each performed in the good times (up until mid-2007) and then in the bad times. Did the 2045 target funds gain and loose more money than the 2025 funds? Did the 2005 funds protect people from the volitility like it should have? Just a thought…might be interesting.