Global stock markets welcomed the new year with strong advances on the first day of 2009 trading, extending the gains achieved during the last week of 2008. The S&P 500 rose nearly 7% last week and is up 24% since the late-November bear market low. While stocks rallied, some of the shine came off U.S. Treasuries, as the 30-year bond fell 6% in just two days. This strong equity market performance continues the recent trend of investors shrugging off bad news, suggesting stocks may have fallen enough in 2008 to discount the difficult economic conditions the world is experiencing today. Of course, trading volume has been at seasonal lows, so the real test comes this week when both bullish and bearish investors return to work.

We all know the arguments for stocks to resume their bear market decline – global recession, massive deleveraging, corporate losses, etc. – but let’s take a look at some positives that support stocks in the short run. First, investors put $23 billion into equity mutual funds in December after taking out a record $320 billion from all funds in 2008, suggesting that the forced selling is beginning to abate. January is typically a good month for equity fund flows, and stocks may benefit from asset allocation rebalancing. Second, the Volatility Index (or VIX) has declined by more than 50% from its November high to a recent 37, indicating that investor psychology is greatly improved. Finally, early signs have emerged that the tremendous stimulus provided by the Federal Reserve and U.S. government are helping to stabilize the credit markets. (We can debate the long term implications of these actions in future posts.)
This week the markets will have plenty of important news to digest. Details of President-elect Obama’s approximately $800 billion fiscal stimulus plan emerged over the weekend, including a projected $300 billion tax cut. The week’s economic releases are highlighted by the December payroll employment report to be released on Friday. This is clearly expected to be a bleak report, with the consensus view that the economy lost 500,000 jobs last month and the unemployment rate rose to 7.0%.

Disclosures

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.