Fidelity Investments Institutional Services - Monthly Market Commentary January 2009
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Fidelity Investments Institutional Services Monthly Market Commentary January – 2009 For Investors
Monthly Market Commentary
Jurrien Timmer
Director of Market Research & co-pm of Dynamic Strategies Fund
January 7, 2009
Happy BULLISH New Year!
Good riddance to 2008! It will surely go down in the history books as one of THE worst years ever for risk assets.
The S&P 500 index fell 40%, emerging markets stocks got smoked, commodities collapsed, credit spreads exploded, and Treasury
prices soared.
The year 2008 will also be remembered as the end as we know it for the golden era of financial engineering, ranging from hedge funds to
private equity to all kinds of structured credit. The Bernie Madoff scandal only serves to seal the fate for hedge funds.
The year will also go down as the year of the next (last?) great bubble, namely Treasuries, and the year in which the seeds were sown
for a nasty inflation cycle in the next few years. The Fed is pulling out all the stops (as they should), but in doing so is creating the next
moral hazard.
But enough about 2008. The year 2009 is shaping up to be a much better one for risk assets.
Technically the charts strongly favor a cyclical bull market for stocks, with upside potential of 50-60% for the S&P 500 index. The chart
set-up of a rounding medium-term momentum curve plus all the divergences and sentiment extremes during the October-November
period is about as compelling as anything I have ever seen. With the S&P 500 index now breaking out above 900, that sets up for the
next target of 1050.
That’s not to say that the economy is out of the woods, of course. Au contraire, the jobless rate could well spike to 9% in the next few
quarters. But, stocks typically lead the economic cycle by 4-6 months, and with a peak-to-trough decline of 52% and a P/E of 11.5x, one
could easily make the case that a nasty down-cycle is more than priced in.
The charts also favor a robust bear market for Treasuries, with targets at 2.75% for the 10yr. High yield bonds at spreads of 2200 bp
over Treasuries seem like the deal of the century, apparently pricing in twice the number of defaults as occurred during the Great
Depression. For bond investors, HY and TIPS appear to be the way to go in 2009.
Investment Consulting Services
Not FDIC insured. May lose value. No bank guarantee.
Past performance is no guarantee of future results. It is not possible to invest directly in an index or average. Index performance is not
meant to represent that of any Fidelity mutual fund. 2Monthly Market Commentary The Chinese stock market looks very compelling now that it has completed a picture-perfect bubble roundtrip, and commodities of all stripes are ripe for a rebound. The Refi index is booming and even the CRB Spot Raw Industrials index appears to be forming a bottom. Is the battle at Armageddon (being deflation and reflation) finally being won by the forces of Good? By the way, I was glancing at CNBC the other day and a poll showed that most experts expect crude oil to go to the $40-$75 range in 2009. No big surprise there. But, did you know how many are expecting oil to trade above $75 in 2009? Zero! Yes, zero. I will take the contrarian view on that one, thank you very much. Meanwhile, the spread between safe sectors (consumer staples) and risky sectors (materials, etc), is as wide as I have ever seen it (as per the Spaghetti chart), which for equity pms strongly argues against hiding in safe sectors at this time. The risk/reward simply does not justify it. All in all, the time is ripe to be returning to risk assets. The Next Great Bubble: Treasuries With T-Bills yielding zero and the 10yr recently closing in on a 1-handle, Treasuries have become the next great bubble. Once the flight-to- quality bid disappears, the rise in yields will be something to behold. When will this happen? It’s hard to tell. Perhaps it has already started or perhaps the Fed’s promise (or threat?) to buy coupons will keep Treasuries bid for sometime. One thing is becoming increasingly certain: Inflation is going to be a major risk in the years ahead. With trillions already spent by the Fed and Treasury, and another $750B or so in fiscal stimulus on the way in the coming months, at some point the economic cycle will turn up again. It always has and it always will. When that happens, private sector credit growth will start to turn up again, ending the dreaded liquidity trap that currently exists (a liquidity trap occurs when the Fed is pumping money into the banks, but the banks are not passing it on into the real economy). With money supply growth already sky high as it is, when the banks start lending again it will be essential for the Fed to withdraw all this liquidity, or we will be facing an inflation spiral in the next few years. Investment Consulting Services Not FDIC insured. May lose value. No bank guarantee. Past performance is no guarantee of future results. It is not possible to invest directly in an index or average. Index performance is not meant to represent that of any Fidelity mutual fund. 3
Monthly Market Commentary
One has to have a lot of faith in the Fed’s ability to withdraw all this excess liquidity just in time. I for one have my doubts. Why?
Because there are natural lags involved. For one, there will be immense political pressure to not drain liquidity until the economic cycle clearly
recovers. The clearest sign of a recovery would be a falling unemployment rate.
But guess what? The jobless rate is just about the most lagging economic indicator there is, which means that by the time the jobless rate
peaks, the economic recovery should be well underway. That means that the Fed will likely not be able to drain liquidity in time to prevent an
inflationary cycle.
That means an upward climb for Treasuries and the inflation rate. Not only will the then-growing economy take away the flight-to-quality bid from
investors, but the Fed will not be needing or wanting to buy coupons either. Why? Because the entire reason the Fed is threatening to buy out
the curve is to force the banks to lend. After all, if you are a bank and are borrowing near zero, and the Fed’s bid for high quality assets is
pushing those yields down to 2%, wouldn’t you be tempted to start actually lending to real businesses at multiples of that? This is what the Fed
is trying to accomplish with its quantitative easing efforts. But when private sector credit starts to grow again, the Fed will be off the hook. That
means higher yields for safe assets and tightening credit spreads.
Finally, the marginal buyer of Treasuries in recent years has been China. China is now committed to stimulating its own economy. That means
it is likely to start spending some of its $2 trillion cache of reserves on internal investments instead of buying our Treasuries.
All in all, I see absolutely no reason to be long Treasuries of any stripe, except for TIPS. The main risk to my outlook is that the threat of Fed
buying keeps the bubble from popping for a while. But pop it will.
Investment Consulting Services
Not FDIC insured. May lose value. No bank guarantee.
Past performance is no guarantee of future results. It is not possible to invest directly in an index or average. Index performance is not meant
to represent that of any Fidelity mutual fund. 3Monthly Market Commentary
Definitions:
S&P 500 is an unmanaged index of the common stock prices of 500 widely held stocks and includes reinvestments of dividends
Russell 1000 Growth Index is a market capitalization-weighted index of those stocks of the 1,000 largest U.S. domiciled companies that exhibit growth-
oriented characteristics.
Russell 2000 Index is a markets capitalization-weighted index measuring the performance of the smallest 2,000 companies, on a market capitalization
basis, in the Russell 3000 Index
Russell 3000 Growth Index is a market capitalization-weighted index of those s tocks of the 3,000 largest U. domiciled companies that exhibit growth-
oriented characteristics.
Russell 3000 Value Index is a market capitalization-weighted index of those stocks of the 3,000 largest U.S. domiciled companies that exhibit value-
oriented characteristics.
Morgan Stanley Capital International (MSCI) Europe Index is an unmanaged index that measures the performance of stock markets in Austria,
Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom.
Morgan Stanley Capital International (MSCI) Emerging Markets Free – Latin America Index is a market capitalization-weighted index of approximately
170 stocks traded in seven Latin American markets.
LB Aggregate Bond (Barclay’s Capital Aggregate Bond Index) is a market value-weighted index of investment-grade fixed-rate debt issues, including
government, corporate, asset-backed, and mortgage backed securities, with maturities of one year or more.
Merrill Lynch High Yield Master Index is a market value-weighted index of all domestic and Yankee high yield bonds. Issues included in the index have
maturities of one year or more and have a credit rating lower than BBB-/Baa3 but are not in default.
Past performance is no guarantee of future results. It is not possible to invest directly in an index or average. Index performance is not meant to represent that of any Fidelity
mutual fund.
The views expressed in this statement reflect those of Jurrien Timmer only through the end of the period of the report as stated on the cover
and do not necessarily represent the views of Fidelity or any other person in the Fidelity organization. Any such views are subject to change at
any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These views may not be relied
on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an
indication of trading intent on behalf of any Fidelity fund. S&P 500 is a registered service mark of the McGraw-Hill Companies, Inc.,
Fidelity Investments & Pyramid Design is a registered service mark of FMR LLC
Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact your investment professional or
visit advisor.fidelity.com for a prospectus containing this information. Read it carefully.
Not NCUA or NCUSIF insured. May lose value. No credit union guarantee.
Fidelity Investments Institutional Services Company, Inc., 82 Devonshire Street, Boston, MA 02109
4
422796.37.0You can also read
