2008 Economy & Stock Market Highlights

2008 will go down as a record year in the history. Most analysts and economists were predicting a slowdown in the economy and a soft landing earlier this year. However no one was even in the ballpark w.r.to the actual events. The complete world was taken by shock with the magnitude of the financial mess and global recession/slow down. There was unprecedented volatility in global stock markets, commodities like oil, Gold etc, Currencies, interest rates and a whole bunch of key economic fundamentals. This is expected to be the worst recession (some are even calling it depression) since the great depression in 1929. Almost all developed countries and key emerging/developing countries like China, Russia, Brazil, India etc are impacted in this global crisis.

Some of the key highlights/statistics from an economic perspective are listed below

ü All major stock markets down from their record highs in Oct 2007

o Dow is down almost 40-45% from its peak

o NASDAQ is down by around 45%

o S&P 500 is down by 40%

o BSE Sensex is down 55-60%

ü S&P 500 market has lost $6.17 trillion dollars in Market cap in the last year

ü S&P broad market index which has around 11,000 stocks in developed and emerging markets has lost around $17.7 trillion YTD

ü The entire Investment banks segment has been wiped out – Bear Sterns & Lehmann doesn’t exist anymore, Merrill Lynch has been acquired by BoA, Morgan Stanley and Goldman Sachs have converted into commercial banks

ü After Lehmann collapse the entire global credit market was frozen and there were massive money injections from multiple governments (US itself is investing over a trillion dollars this year to re-energize the market)

ü Several large & reputable US financial institutions have failed – Wachovia, Washington Mutual , Fannie Mae, Freddie Mac, AIG etc.

ü 25 US banks have failed so far this year and has been acquired by FDIC

ü US Federal Reserve interest rate is at a 50yr low of 0.25% with today’s cut

ü Oil started our 2008 at little under $100/barrel and reached a peak of $147/barrel in July and dropped to $40/barrel in Dec

ü In the last 15 months Gold which is typically the most stable asset went from <$700/ounce to a peak of $1020/ounce and is now back to $800/ounce

ü US Dollar has bucked a multi-year trend of weakening against global currencies and has appreciated against major global currencies by almost 15-20%

ü The US auto industry is in Doldrums and giants like GM, Ford and Chrysler are on the verge of going bankrupt

o GM’s stock is at a 80 yr low

ü US unemployment rate has gone up to 6.7% and number of unemployed people has increased by around 2.7 million during this year

ü All major global economies are either in recession or in the verge of getting into recession

o Ireland, New Zealand, France, UK, Germany, USA, Japan, Italy, Singapore, Spain to name a few

o China growth is expected to slow to 7.5 – 8 %. This is its lowest since 1990.

o India growth rate is expected to slow to 7.5% (from the 5yr average of close to 9%)

After reading the above the first question that comes to mind is have we seen the worst of this crisis?

I think we are in the middle of this crisis what we have seen so far is the first half of the crisis. There is more of financial crisis that is yet to come, Lay-offs are just starting out and has accelerated in the last 3 months and it will continue thru most part of 2009. There will be budget and spending cuts leading to reduction in customer spending and consequently impacting a wide range of industries etc. To cut to the chase the current scenario will continue thru the first half of 2009 and should start flattening out as we go thru the year. I expect the stock market to be volatile and fluctuate within a band during most of 2009 and start the climb up in 2010.

Is this shake out/recession good for us?

At the outset some of the news we hear and what we see in news would seem scary. However this is part of the economic cycle. The best part of open markets/economy is the self-correction. Companies start becoming inefficient and add lot of fluff over the years. These economic downturns are the times when some of the weak players are eliminated and strong players become more efficient and focused. While we go thru lot of pain in the near term it is good from a longer term perspective. Stock valuations, real estate valuations etc are very attractive now and while there is a little down side to it in the near term over the medium to long term they will start climbing up and this is a good time to start investing.

Stop worrying & start investing!!!

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