Economic Forecasting and Recent Trends
At the Economic Cycle Research Institute (ECRI) in New York, predicting turning points in economic cycles and inflation is of utmost importance. Historically, ECRI has been successful in this endeavor, garnering recognition for accurately forecasting the 2001 recession.
However, the ongoing economic downturn presents a more complex challenge. ECRI provided early warnings in late 2007 but maintained a cautious optimism that a recession could be avoided. In a November 2007 report, ECRI stated, “the leading indexes are not yet in a recessionary configuration; thus, a recession can still be avoided.” Unfortunately, history has revealed otherwise, as we now understand that the recession officially began in December 2007, according to the National Bureau of Economic Research (NBER), despite an official dating that lags by a year.
Introducing The Beta Investment Report
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Declining Trade Activity
The trade boom is slowing down, a reality that isn’t surprising given the global economic slowdown. This decline in export activities is particularly daunting for the U.S. economy.
In 2008, exports were a rare bright spot, offering much-needed support as other sectors faltered. The second quarter marked a peak, with real export growth reaching an impressive 12.3% annualized while GDP grew by 2.8%. This surge helped alleviate some of the negative impacts of decreased durable goods spending and growing concerns from the GDP trend. In the third quarter, export growth slowed but remained solid at 3.0%, contrasting sharply with the 0.5% decline in GDP.
Understanding Investment Risks
The inherent uncertainty in the future presents a significant challenge in the investment landscape, with risk levels continuously fluctuating like market prices or the careers of actors.
This variability in risk suggests a correlation with expected returns, although our capacity to accurately model and interpret this connection has limitations. There are times when the relationship between risk and return becomes particularly obscured.
Currently, we find ourselves in such a period, characterized by both significant opportunities and heightened risks. Recognizing this dynamic is essential for both capitalizing on potential benefits and safeguarding against increased dangers.
Current Economic Conditions
We are currently witnessing the eye of the economic hurricane, and the focus centers on the duration of this turmoil and potential swift remedies to ease the pain and restore economic growth. Presently, we are ensnared in a recession—one that is particularly severe.
This morning’s dismal employment report for December unveils grim details. The unemployment rate surged to 7.2% from 6.8% and is expected to increase further. Additionally, nonfarm payrolls contracted by over 500,000 for the second month in a row, as illustrated in the chart below.
With December’s figures now available, 2008 marked a complete loss of jobs throughout the year, with the situation worsening as the year progressed. So far, nearly 2.6 million nonfarm jobs have been lost to this recession, which originated in December 2007, as determined by the NBER.
Treasury Note Trends
The recent selling of the 10-year Treasury Note and the accompanying rise in yield since December 31, while currently considered a minor shift, raises questions about future trends.
As of yesterday’s session, the 10-year yield was approximately 2.5%, still historically low but an increase from the 2.04% low reached last month. While this could be mere market noise, the current conditions leave room for suspicion.
The Trials of Investment Strategies
The past year has rigorously tested numerous investment strategies, including those centered on asset allocation and diversification. Indeed, most significant asset classes faced declines in 2008. This raises questions about the efficiency and reliability of asset allocation practices. Did asset allocation fail, or did it meet expectations despite the chaos?
In a recent edition of The Inside View, we delved into these questions with Richard Ferri, founder and CEO of Portfolio Solutions, a fee-only advisory firm in Troy, Michigan that specializes in constructing and overseeing investment portfolios with index funds and ETFs at a minimal fee. Ferri is a recognized expert in asset allocation and index-based investing, having authored several significant works, including All About Asset Allocation and The ETF Book. For insights on current asset allocation perspectives and why Ferri believes it remains critical for sound investing, listen to the interview…
Rising Deficits and Debt
The ongoing accumulation of deficits and debt continues to grow, making it increasingly difficult to ignore this pressing issue.
The debate over whether the U.S. can summon the courage needed to curb the rise in red ink persists. Current projections indicate an alarming increase in absolute and relative debt levels, corroborated by a growing number of observers.
Among them is a recent report from the St. Louis Fed titled Deficits, Debt and Looming Disaster: Reform of Entitlement Programs May Be the Only Hope. Michael Pakko, an economist at the bank, notes, “For the fiscal year 2008, the federal government’s deficit reached a record $455 billion, the largest ever for a single year.” Furthermore, the total federal debt surpassed $10 trillion for the first time at the end of the fiscal year.
Stock Market Performance Trends
The U.S. stock market is poised to register its poorest decade of performance since historical records began. While this revelation is startling, it is not catastrophic; rather, it sheds light on the evolving landscape of equities and investor sentiment throughout the years.
Ron Surz of PPCA Inc. notes in a recent research report, “Unless there’s a significant rally in 2009, the 2000s will represent the worst performing U.S. stock market decade ever, actually resulting in losses for the first time.” Surz further estimates that a remarkable 40% return in 2009 would be necessary for investors to break even for the decade.
Reflecting on 2008
The year 2008 has come to a close—and it won’t be missed. However, the repercussions will linger for some time across multiple fronts, necessitating a review of the past twelve months.
As illustrated in our first table below, 2008 brought widespread losses across nearly every asset class, with only cash and bonds escaping the red ink. Double-digit declines were common last year. Nevertheless, December’s performance was notably better. REITs, in particular, made a remarkable recovery, soaring almost 18% in December.
Most other asset classes saw similar, albeit smaller, gains for the month. The exceptions were cash and commodities. It is still uncertain if this rally signifies a genuine turnaround or if it is merely a brief respite in an ongoing bear market. Given the extent of last year’s losses, there is hope that positive returns may yet emerge across various asset classes beyond cash.
