April 2nd, 2009
After ruminating on the rally we saw in March, it is time to shift our focus on to the remaining 9 months of the year. Now, more than ever, investors are asking their advisors if we did indeed reach the market bottom in early March. It is best to recognize "exact market timing" as a myth, and instead recognize when opportunities present themselves and invest accordingly.
As the market re-tested its lows, and enjoyed a nice rally, sentiment on the street seemed to turn from a smile to a smirk as the market raged on. Continued weakness in the economy is expected, but this weakness is already priced into the market. To assist you better understanding the current economic conditions, we are pleased to bring you highlights from the most recent Zacks Economic Report.
The Outlook in Brief
Despite a recent upturn in equity markets, the earlier implosion, and other signs of weakness, especially abroad, darkened an already-dismal economic landscape. Expected near-term declines in GDP were deepened, and the projected upturn starting in the second half has been trimmed back significantly. GDP is now expected to decline at a 5.5% pace in the first quarter, and fall at a 0.5% rate in the second quarter. In the second half, GDP is projected to grow at just a 1.4% pace.
This forecast assumes that equities decline 22% (at a quarterly rate) in the first quarter, versus a 5% decline expected last month, and carving an additional $2.1 trillion from household net worth. This decline significantly restrains consumer spending relative to last month's forecast in the second half
of this year and in the first half of 2010.
Every major component of final sales, save government spending, is significantly weaker in the first half of 2009 in this forecast than last month. Overall final sales are expected to decline at nearly a 4% pace in the first quarter before flattening (0.0%) in the second quarter. The downward revisions in
capital spending components were especially sharp, as the credit-market dysfunction and growing pessimism begin to weigh heavily on this sector.
GDP is now expected to decline 0.9% in 2009 and to rise 3.5% in 2010, both 0.6 percentage point less than we expected last month. As a result, the unemployment rate is expected to peak at 9.4% early next year and to decline to just 8.1% by the end of 2011.?? With considerable slack emerging in the economy, inflation quickly falls to near zero, and by 2011 moves into a period of mild deflation. Core consumer inflation (excludes food and energy prices) is projected to rise 0.4% in 2009, remain flat in 2010, and decline 0.2% in 2011.
The federal funds rate target remains pinned near zero into late 2011, and the Federal Reserve's unconventional policies will be pursued aggressively to promote easier credit conditions. The Fed will continue to emphasize its conditional commitment to keep the federal funds rate near zero, will
expand its credit facilities, and begin the purchase of longer-term Treasury securities in order to ease credit conditions.
Zacks Investment Management