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Economic Realities - First Quarter, 2008

Dan Junkin

What a Difference a Quarter Makes.

Here are this column’s predictions for 2008 – as presented in last quarter’s newsletter:

  1. ...we will not begin to feel better about housing until late fall (of 2008)...
  2. I expect the price of oil to retreat...to perhaps the mid 80's range.
  3. (In terms of fixed income) ... we have seen most of the worst...
  4. ...I do not expect a full-fledged recession...
  5. ...the US stock markets will have a modestly OK year...
  6. High quality fixed income will be a good area...mortgage-related securities will still have a tough time.

Obviously, I was a bit optimistic a quarter ago. 

Even though sales of housing nationwide have perked up of late – prices are still falling.  We may feel better about housing by the fall, but that may be just because we are more accustomed to a lower price and sales base. 

Oil has come off about 10%, but we are still very close to $100 a barrel.  It does appear that commodities – chiefly oil – are over-bought.  Oil and commodities should slow during the rest of this year – if for no other reason than the slowing international economy.

Prior to the Bear Sterns “week-end”, the stream of bad fixed income news had slowed.  Since then, the tone in the bond market has improved.  Still unknown, however, is the extent of exotic instruments and their ultimate value.  Today high quality bonds and mortgage-related securities are doing better.

Strange as it may seem, the broad US stock market has held up remarkably well.  If you had told me a year ago all that lay ahead, I would have predicted a difficult bear market.  In fact, we have not even had an “official” bear – down 20% from a recent high.  Thus far, we have only fallen in the high teen’s.

Of late, there have been some interesting anecdotal and other indicators (such as insider buying and some valuation measures) which would seem to be pointing up for stocks.  I expect that US stocks will trend up between now and the end of the year.

Finally, what about a recession?  I was probably wrong on this one.  Even though employment is still in good shape and exports are holding up well (due to the decline of the dollar), the consumer is clearly nervous.  That unease and the very real drag of the cost of oil is resulting in lower consumer spending.  And that will tip us over into a recession.  However, I do not expect this to become a depression or even a long, drawn-out recession.

I applaud the innovation and boldness of the Federal Reserve.  They have been dealing with threats to the very infrastructure of our financial system.  Simply lowering rates would not have been enough.  They have stepped up and made some very tough and timely interventions.

All things considered, the earlier predictions were only about 50% on target and too optimistic.  That having been said, I do not see anything which would lead us to recommend changes to clients’ long term asset allocations.

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