Bartlett Quarterly Review
July - September, 2009
Patience is a virtue: A year after the financial world was shaken to its core, the equity markets sprinted through the third quarter, although they crossed the finish line gasping for breath. The Dow and S&P 500 had their best quarters in more than 10 years, and have now regained a little over 40% of their losses since their October 2007 highs. The Nasdaq has done even better, coming more than halfway back to its 2007 high. Less-bad economic statistics began to level off, and toward the end of the quarter, some even turned positive (sadly, unemployment rates weren't among them). Equity analysts began weighing both the odds of the rally's running out of steam and the idea that cost-cutting and easy year-over-year profit comparisons might support equities through year-end.
Bond investors (assisted by Fed purchases) seemed to digest more Treasury debt without difficulty. Bond funds continued to receive the bulk of mutual fund new cash inflows during the quarter. The yield curve between 2-year and 10-year Treasuries, now at 2.36%, is steeper than the 1.85% of a year ago. The dollar continued its slide relative to the euro, and gold ran true to form by rising sharply in September.
Quarterly Economic Perspective
- Unemployment problems increasingly spilled over into housing. The estimated percentage of mortgages that were either delinquent or behind at least one payment ranged from 3% to more than 5% during the second quarter (the most recent statistics available). By the end of May, prime fixed-rate mortgages reportedly represented one of every three new foreclosure filings, according to the Mortgage Bankers Association; a year earlier, they were one out of every five.
- Seasonal improvement in home sales--July resales were up 7.2% from the previous month--waned by quarter's end. August inventories of unsold homes improved, but were still substantially above last year's levels. The pipeline of foreclosures yet to be processed and the scheduled November end of the tax credit for first-time buyers represented potential storm clouds.
- As Federal Reserve Chairman Ben Bernanke pronounced the recession "very likely over," the Fed began winding down purchases of Treasury debt. It expects the entire $300 billion to be spent by the end of October but will continue to buy mortgage-backed debt through the end of March. Despite the support those purchases have given the bond markets, yields on the 10-year bond have risen from 2.54% on March 18, when the program was announced, to 3.31% on September 30.
- Treasury Secretary Tim Geithner announced that $70 billion of the $250 billion loaned to banks over the last year has been repaid. Loans that have been repaid in full have earned a 17% return.
- Initial public offerings (IPOs) and corporate mergers and acquisitions, which had slowed to a crawl in the wake of the credit crisis, began to show signs of renewed life in the third quarter. The Disney/Marvel Entertainment, Dell/Perot Systems, Xerox/ACS, and Abbott Labs/Solvay deals, plus Kraft's bid for Cadbury, joined previously announced mergers of Pfizer/Wyeth and Oracle/Sun as indicators that the credit markets are more open to financing corporate acquisitions.
- Retail spending statistics got a boost from the federal "cash for clunkers" program, which was extended and then abruptly ended in late August because of its unanticipated popularity.
Economic Data/Currencies
The Markets
Investor's Almanac
History Lessons: September's stellar performance by the equity indexes confounded investors who relied on the month's reputation as the worst month for equities. Past Septembers dating back to 1929 have seen an average decline of 1.2%; by contrast, the S&P rose 3.63% last month. It's not a record; 1939's 16.5% gain holds the record for Septembers. On the other hand, it's also nothing to sneeze at, especially compared to last September's 9% drop or the worst September on record (1931's -29.9%).
Did You Know? It ain't over 'til it's over, but it's over long before the fat lady sings: It takes anywhere from 6 to 18 months after a recession ends for the National Bureau of Economic Research (NBER) to make it official. The NBER formally labeled the current cycle a recession a year after it began in December 2007.
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