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Most of the financial community would like to forget 2008 due to the sharp drop in equity values, numerous major bankruptcies, and seizing of the credit markets. So, should you look forward to 2009' Based on a surge in stocks the first trading day of the year, you should. But the economic data suggest that the first day fireworks might have been premature.
 After a dismal 2008, equities got off to a good start on the first trading day of the year – the last trading day of this past week. Despite negative economic news on manufacturing, consumer confidence, and home prices, equities ended the week up. An end-of-the week surge occurred despite a nearly 29-year low for the ISM manufacturing index. The first trading day of the year saw index gains ranging from 1 to 3.5 percent. Leading stocks upward Friday were oil companies. Higher oil prices boosted the energy sector. Also, although in thin markets, the belief that the economy will be improving in latter 2009 and that the worst-to-come economic news is already priced in led to a late Santa Claus rally.
The Dow closed the week above 9,000 for the first time since this past November. On Friday, the Dow had its best opening day since 2003, rising 2.9 percent. For the week, strength was in the transport sector, energy, and even some commodities oriented companies such as Alcoa. GM got a boost from the Treasury granting the company a bridge loan in exchange for preferred stock.
 Equities were up significantly this past week – keeping in mind that trading was thin. The Dow was up 6.1 percent; the S&P 500, up 6.8 percent; the Nasdaq, up 6.7 percent; and the Russell 2000, up 6.1 percent.
Recapping 2008 is not pretty as equities posted the largest declines in decades. It was hard to find winners as Wal-Mart and McDonalds were the only components in the Dow to post net gains for 2008. For the Dow, 2008 saw the biggest yearly drop since 1931. The Dow fell 51 percent in 1931 compare to down 33.8 percent for 2008. But among the major indexes, the techs took the hardest hit. The Nasdaq had its worst year ever, dropping 40.5 percent.
 Within the year, the greatest damage was the October plunge in equities as major indexes generally fell 15 to 20 percent for the month. The declines were due to increased worries over the credit crunch, announcements of steep losses by banks and other financial firms, increased fears of recession, and panic selling. Aggressive rate cutting by the Fed from September into year’s end only limited the damage as equity weakness was spread throughout most of the third and fourth quarters. Some mild lift was seen in some equities in December on the belief that the Obama administration’s planned fiscal stimulus will boost the economy.
 The deep losses of 2008 wiped out the generally healthy gains seen in 2006 and 2007 and even earlier. At close December 31, 2008, the Dow at 8776.39 was back at levels last seen in 2003. The S&P 500, Nasdaq, Russell 2000, and Wilshire 5000 also were knocked back to values not seen since 2003.
For the 2008 cumulative, major indexes were down as follows: the Dow, down 33.8 percent; the S&P 500, down 38.5 percent; the Nasdaq, down 40.5 percent; and the Russell 2000, down 34.8 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 This past week trading in the Treasury market was thin due to the holidays. However, most rates firmed despite negative economic news during the week. Rate gains were primarily in notes and bonds.
Most of the rate gains were on Friday on increased market belief that expected fiscal stimulus from the Obama administration actually will boost economic growth not far down the road. Also, a sharp boost in equities led funds to flow from Treasuries to stocks. Earlier in the week, Treasury prices had risen on flight to safety due to mid-East tensions.
The short end is still being held hostage by the Fed’s continued pumping of liquidity into credit markets as the 3-month T-bill remained only marginally above zero.
 For this past week Treasury rates were mixed but mostly up as follows: 3-month T-bill, up 9 basis points; the 5-year note, up 20 basis points; the 10-year bond, up 27 basis points; and the 30-year bond, up 21 basis points. The 2-year note edged down by 2 basis points
Over the past year, the entire yield curve has shifted down with rates declining from about 1-3/4 percentage points on the long end to over 3 percentage points on the short end.
A number of factors pushed rates down. On the near end, rates were slammed by the Fed’s aggressive easing. The fed funds target rate stood at 4.25 percent at the end of 2007 but had been slashed to a target range of zero to 0.25 percent. At times in December, flight to quality was so strong that the yield on the 3-month T-bill even turned slightly negative as investors care more about protecting capital than earning yield. Yes, some investors paid the Treasury to borrow their money.
 Over the year, longer-rates were pulled down by gloomy economic news, flight to safety over continued failures and fears of failures of financial firms, and eventually by lowered inflation expectations. Concern over high inflation continued into mid-year as oil prices rose throughout the first half of the year until an early July peak. The rapid drop in oil prices helped bring down inflation expectations and long bond yields. Toward year end, rates were softened by the temporary bailout of U.S. automakers as the Treasury announced it would be taking an equity position in GM. Finally, the Fed’s announcement that it would consider buying long-term Treasuries to help mortgage markets helped long rates ease further.
For 2008 net, Treasury rates were down sharply as follows: 3-month T-bill, down 216 basis points; the 2-year note, down 229 basis points; the 5-year note, down 189 basis points; the 10-year bond, down 182 basis points; and the 30-year bond, down 177 basis points.
 Oil prices posted a strong net gain of almost $14 per barrel for this past week. The oil markets had raised concern over Israel’s military strikes in the Gaza Strip and over Russia’s cutting supplies of natural gas to the Ukraine. The latter two countries were unable to agree on a price for natural gas for 2009. The cutting off of natural gas boosted concern that there will be an increase in demand for oil and possibly a reduction in supplies of oil. Given the geopolitical events, it actually is surprising that prices did not rise more – which indicates how strong the view is that demand is going to remain weak for some time.
Net for the week, spot prices for West Texas Intermediate jumped $13.99 per barrel to settle at $46.34 – and coming in $98.95 below the record settle of $145.29 per barrel set on July 3, 2008.
For 2008 net, however, oil prices actually ended down despite spending time at record highs during the first half of the year. As of close December 31, 2008, West Texas spot stood at $44.60 per barrel, down 53.5 percent from $96.00 per barrel at the end of 2007. The plummet in oil prices was due to the sharp onset of economic contraction in economies around the globe – including in Europe, Asia, and North America.
The economy is ending the year very down beat. Manufacturing is in deep recession and housing has not yet begun to pull out of its depressed conditions. Notably, house prices continue to fall. Not surprisingly, consumer confidence is near historic lows.
 As expected, the manufacturing sector is worsening due to a drop off in demand worldwide. In fact, the pace of decline has accelerated as indicated by December’s 32.4 reading for the ISM's manufacturing index -- one of the very lowest readings in 60 years of data and down from 36.2 the month before.
The December report is filled with record lows or near record lows. One of the most worrisome is an 18.0 reading for prices paid, a low last exceeded back in 1949. No industry reported price increases. Price weakness was seen across the board – not just in oil and other commodities but also in manufactured goods such as electrical equipment, furniture, and computers.
The outlook for manufacturing is not good. The new orders index has contracted 13 consecutive months and is at the lowest level on record as is the index for orders backlogs. Basically, manufacturers are shutting down capacity in order to reduce inventories in response to the falloff in demand.
 Not only is the manufacturing sector deteriorating, but also business in general, according to the Chicago NAPM. Business conditions for firms in the Chicago area continued to decline in December, but at least not at an accelerating rate. The main index was little changed at 34.1, one of the lowest readings in the 40-year history of the report. But the index is still well up from the June 1980 record low of 21.3.
In line with the ISM report, however, the Chicago prices paid index hit a record low, falling more than 20 points to 30.5, reflecting both weak demand and the need to reduce stocks. Cutting inventories currently is a national pastime. The inventory index fell nearly 5 points to 36.4.
While contraction was steady in December, that may not last. New orders and backlog orders have been in the 20s and may be signaling a speed up in the rate of decline in the months ahead.
 The housing market needs house prices to stabilize before sales and construction can pick back up significantly. Low house prices certainly help first time buyers, but not those wanting to trade up or need to move. Current homeowners can sell only if they can cover their current mortgage with the sales price less broker and other fees. But home prices are still plunging according to the October Case-Shiller 10-City Home Price index which fell a monthly 2.1 percent. All cities in the sample posted declines.
The year-ago pace for the 10-city index is minus 19.1 percent. This decline is sharper than the Census new single-family house price index – which is down about 7 percent (smoothed). The Case-Shiller index matches prices changes for same houses while the Census number does not. The Census number is kept higher by a sharper drop off in low end homes sold than in the high end.
Unfortunately, many cities are being hard hit by the drop in house prices. The year-on-year rate of decline is over or near 30 percent in Phoenix, Los Angeles, San Diego, San Francisco, Las Vegas and Miami. These are unprecedented declines that reflect distressed sales and point to further foreclosures ahead and will weigh further on prices.
 Layoffs are pushing consumer confidence down. The Conference Board's consumer confidence index for November hit a new low for the current recession, dropping nearly 7 points to 38.0. The present situation component, at 29.4, fell more than 10 points and is at its lowest level since the early 1990s. The expectations index also declined – by about 2 points.
The report detail on employment helps to explain the extremely low confidence numbers. More said jobs are hard to get (42.0 percent) and fewer said jobs are plentiful (6.2 percent). The reading six months out is nearly the same (41.0 percent vs. 9.7 percent). The November detail also indicated a worsening in expectations for future income. Based on the latest consumer confidence report, those with jobs are not in the mood to spend and will be keeping a tight grip on their pocketbooks and billfolds.
This past year ended on a very negative note – and the year-end numbers are still in the pipeline. Looking ahead for January, we need to be anticipating very negative economic news – at least for the near term. Layoffs continue and the unemployment rate will likely rise sharply. Housing foreclosure rates are being pushed up by a fall in house prices which limits the ability to refinance. Industrial production will likely post horrific declines in December and January, based on auto assembly shutdowns and overall weak demand. Retail sales are likely to be deeply negative in December (released mid-January). Construction weakness probably will extend to the commercial sector as shopping malls fall into bankruptcy and businesses cut back on office expansion. Exports will slow on weak overseas demand due to recession in numerous countries. The real question is whether the markets have already built in these likely economic outcomes. Most likely, equities have not yet completely built in how deep the first quarter decline will be.
What about the credit markets' Treasury yields are at or near record lows – primarily due to flight to safety. This may be a reasonable near term strategy (buying nothing longer than 6 months), but when the economy strengthens, bond prices are going to drop. Those holding long Treasury bond may regret it by late 2009 or early 2010 – especially if fiscal stimulus actually works and the markets realize how much debt the bailout has incurred for the Treasury.
Meanwhile, quality commercial paper may be attractive until the economy stabilizes and equities make sense – keeping in mind that stocks typically rise before the economy recovers. Depending on your belief about when the recovery starts, stocks are likely a good choice overall only around the end of the first quarter or second quarter (which assumes economic recovery starting in mid-2009 or late 2009). That is, unless traders quickly build in a very negative first quarter and weak second quarter. Nonetheless, beware high Treasury prices for long bonds.
Overall, we are in for a rough ride economically speaking for at least the first half of 2009. But stocks will pick up as soon as a turnaround appears well in the making.
The only market moving indicators this coming week is Friday’s employment situation report for December. But also likely to get market attention will be motor vehicle sales – given the precarious situation of U.S. automakers – and the FOMC minutes of the December 15-16 meeting which resulted in an historic low fed funds target.
Construction spending dropped 1.2 percent in October, after no change in September. Weakness in the latest month was led by a sharp 3.5 percent drop in private residential outlays. Private nonresidential spending also declined - by 0.7 percent. In contrast, public outlays rebounded 0.7 percent in the latest month. Given the fall in housing starts in October to a record low 625,000 units, residential outlays will likely lead overall construction spending down in November.
Construction spending Consensus Forecast for November 08: -1.3 percent
Range: -2.5 to -0.2 percent
Sales of domestic motor vehicles in November came in at a 7.5 million annual unit rate for domestic-made models - little changed from October. Levels unfortunately are at lows not seen since the early 1980s. Sales are not likely to pick up much in December despite incentives from dealers as the job situation has worsened, credit is still tight, and consumers are worried about U.S. manufacturers still facing the strong possibility of bankruptcy.
Motor vehicle domestic sales Consensus Forecast for November 08: 7.4 million-unit rate
Range: 7.0 to 8.2 million-unit rate
Factory orders in October plunged 5.1 percent, marking a third straight severe decline. Both durables and nondurables orders fell sharply. However, orders for nondurable goods were pulled lower by a mostly price-related fall in energy goods. Based on more recent durables data and further declines in oil prices, November is going to be another very negative month for overall orders. Durable goods orders fell 1.0 percent in November.
Factory orders Consensus Forecast for November 08: -2.5 percent
Range: -6.5 to -0.3 percent
The composite index from the ISM non-manufacturing survey fell more than 7 points in November to 37.3 with new orders, perhaps the most important index of all, falling more than 8 points to 35.4. The composite index is at its lowest level since the series began in 1997. Prices paid dropped nearly 15 points to 36.6.
Composite index Consensus Forecast for December 08: 37.0
Range: 34.5 to 42.0
The pending home sales index for October fell 0.7 percent to 88.9 with the year-on-year rate slipping back below zero at -1.0 percent. But we could see some improvement in November based on a jump in mortgage applications due to the recent, sharp decline in mortgage rates. Most recently, purchase applications in the Dec. 26 week rose 1.4 percent to 320.9.
Pending home sales Consensus Forecast for November 08: 88.0
Range: 84.5 to 90.2
The Minutes of the December 15-16 FOMC meeting are scheduled for release at 2:00 p.m. ET. At the most recent FOMC meeting, the Fed shocked the financial world by cutting the fed funds target to a record low range of zero to one-quarter percentage point. The Fed also said it would likely keep the fed funds rate there for “some time.” Markets will be picking apart the minutes to get more information on the Fed new easing strategy.
Initial jobless claims for the week ending December 27 surprisingly fell a sharp 94,000 to 492,000. The 94,000 drop is the largest weekly drop in 17 years. Because of adjustment factors surrounding the Christmas holiday (including a four day work week), however, the four-week average at 552,250 is a much better gauge which, next only to the prior week, remains at the highest level so far in the recession.
Jobless Claims Consensus Forecast for 1/3/09: 540,000
Range: 490,000 to 580,000
Consumer credit fell $3.6 billion in October, split between a $0.2 billion decline for revolving credit and a $3.4 billion decline for nonrevolving. The annualized percentage change in credit is minus1.7%. Both revolving and non-revolving credit contracted in October with losses centered in the latter and reflecting the collapse in vehicle sales.
Consumer credit Consensus Forecast for November 08: -$0.5 billion
Range: -$5.5 billion to +$3.7 billion
Nonfarm payroll employment in November fell over a cliff with a 533,000 drop, following a revised fall of 320,000 in October. The November drop was the worst since the 602,000 decline in December 1974. Nonfarm payroll employment fell every month in 2008. Average weekly hours edged down to 33.5 hours from 33.6 hours in October. Looking at wage pressure data, average hourly earnings rose 0.4 percent in November after increasing 0.3 percent in October. Turning to the household survey, the civilian unemployment rate spurted higher to 6.7 percent from 6.5 percent in October.
Nonfarm payrolls Consensus Forecast for December 08: -500,000
Range: -750,000 to -300,000
Unemployment rate Consensus Forecast for December 08: 7.0 percent
Range: 6.8 to 7.1 percent
Average workweek Consensus Forecast for December 08: 33.5 hours
Range: 33.2 to 33.5 hours
Average hourly earnings Consensus Forecast for December 08: +0.2 percent
Range: 0.0 to +0.3 percent
Econoday Senior Writer Mark Pender contributed to this article.
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