Monthly Market Monitor - January 2010

Year Ends on Positive Note
As has often been the case, December provided investors with an additional holiday gift as major market indexes continued their climb upward. From 1943 through 2008, the Dow Jones Industrial Average and the S&P 500 have both gained 1.8% on average in December.² These gains are generally ascribed to both the winding down of year-end tax loss selling as well as investor optimism with respect to the coming year. Despite rising market values, questions persist regarding the strength of the underlying economic recovery. The Federal Reserve left its ultra-low interest rates in place during its December meeting. On a positive note, the Fed noted in its statement that "economic activity has continued to pick up" and that the "deterioration in the labor market is abating."³ On the other hand, it did not make any changes to its previous stance that "economic activity is likely to remain weak for a time."³ Eventually, the Fed will have to raise rates to slow the growth of the money supply and temper inflation. Market strategists are at odds over when this will happen. Some see a rising rate environment in the first half of 2010, while others don't see higher rates until 2011.

In a welcome change from 2008, consumer spending rose during this year's holiday season. Last year, holiday sales declined 3.4% as people tightened their wallets during the recession.² Initial estimates for sales in 2009 show an increase of 3.6%.² While this is only based on a short time period, it hints at a potential improvement in overall consumer spending. And since consumer spending typically accounts for about 70% of GDP, any upticks can have a large impact on GDP growth. Another sign that consumer sentiment is improving came from recent Conference Board data. The Conference Board Consumer Confidence Index rose to 52.9 December, up from 50.6 in November. The index attempts to gauge consumer confidence through a monthly survey of 5,000 households. The increase indicates a rise in consumer confidence, which is obviously a good sign for the economy. However, the index was above 100 back in 2006, so there is still plenty of room for improvement.

Housing Outlook Still Uncertain
The seeds of recession were largely sown in the housing market, which has been undergoing a long and slow healing process. Over the summer, home prices began to rise for the first time in three years. The government tax credit for new homebuyers was partially responsible, as it drove up demand. Recent data, however, has not been as encouraging. The S&P/Case-Shiller index, which tracks housing prices in 20 major markets, rose 0.4% (seasonally adjusted) from September.⁵ Without the seasonal adjustment, the index was flat. Prices are now back at the same level they were in the fall of 2003. Some analysts think that prices could fall further due to a potential rise in foreclosures. Currently one in four mortgages is greater than the value of the underlying house.⁴ While not all of these homes will end up in foreclosure, some certainly will. The question is how many.

The housing market is important in many respects, one of which is as a store of wealth for consumers. Declining home prices were one driver of the reduction in consumer spending during the recession. Thus an improvement, or even stabilization, in home prices could help drive up GDP through the effect it might have on consumer spending.

1. Wall Street Journal, 1/04/10
2. Ned Davis Research, 12/30/09
3. Federal Reserve Board, 12/16/09
4. Wall Street Journal, 12/30/09

The views are those of Cameron Lavey, Senior Investment Analyst, Research Department/ING Advisors Network, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

All economic and performance information is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information.

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