Amid losses at AIG and Berkshire Hathaway, what Wall Street strategists and economists are saying about the markets and the economy
By BW staff
If stock market action on the first day of the month is any indication, March isn't looking any better than February. A fresh batch of bad news brutalized U.S. stock indexes on Mar. 2, with the Dow Jones industrial average falling below 7,000 for the first time since 1997. News of a massive loss at ward of the state American International Group (AIG)—a record $61 billion in red ink in the fourth quarter—and setbacks during the quarter for investing icon Warren Buffett's Berkshire Hathaway (BRKA) put already bearish investors in an even worse mood.
To put an exclamation point on things, the Oracle of Omaha in his annual note to Berkshire shareholders said the economy is in "shambles."
And while reports released Mar. 2 on personal income and spending for January came in ahead of Street expectations, as did the Institute for Supply Management's February reading on the health of the manufacturing sector, the news wasn't enough to put a dent in the bearish sentiment.
What are Wall Street strategists and economists saying about the current market and economic situation? Here, BusinessWeek presents a selection of comments published Mar. 2:
Phil Roth, Miller Tabak
The DJIA and the S&P 500 closed at new lows for the cycle [on Feb. 27], but there were a number of positive divergences. The Nasdaq Composite and the Russell 2000 did not break their fourth-quarter 2008 lows, nor did the cumulative advance/decline lines for the S&P 500 stocks and for the NYSE operating companies. However, all those measures are close to their lows, so the only way to convert those divergences to important bullish signals is for a strong rally right away. A few bad days, without intervening strength, will likely result in broad confirmations on the downside. Similarly, momentum indicators, including measures of price, breadth, and volume momentum, have not reached the negative extremes recorded in October-November 2008, but the same caveat applies.
In any case, even if an exploitable bottom is made around current levels, months will be needed to establish a base for a broad, sustained recovery. At best, we believe 2009 can be a transition year even if the lows are in.
Sam Stovall, Standard & Poor's
All 15 bear markets since 1929 declined a median 34%, over 18 months. They retraced 60% of the prior bull market's advance and took 17 months for the S&P 500 to get back to break-even. For mega-meltdowns, or declines in excess of 40%, the numbers were more severe: They declined an average 51%, retraced more than 100% of the prior bull market, and lasted longer than two years. The worst decline occurred in the Great Crash from 1929-32, when the S&P 500 fell 86%. The longest bear lasted 42 months, from 1938 to 1942, while the greatest give-back occurred during the 1937-38 bear, in which the S&P 500 retraced nearly 120% of what it gained in the 1935-37 bull. Therefore, when this bear market is finally over, nothing says it couldn't have experienced the worst of all levels.
Richard Dickson, Paul Desmond, Lowry's Reports
If equities were not low enough on Nov. 20 or on Feb. 23 to attract aggressive buying, then even lower prices are likely before the start of a sustained market advance. As long as the current patterns of increasing supply and weakening demand persist, investors should take advantage of periods of rally to sell into strength and add to defensive positions.
Michael Englund, Action Economics
Today's U.S. economic reports revealed upside surprises to January income and spending that suggest a less dire outlook for the consumer [in the first quarter], though this "missing weakness" appeared later this morning in the January construction spending report. It now appears that construction activity will post its ugliest quarter of the down-cycle in Q1 by a considerable margin, and we now project massive 23% rates of decline for nonresidential fixed investment in both Q4 and Q1 that leave businesses leading the charge lower for the economy as we entered 2009. Today's ISM [manufacturing] report was a tad stronger than expected, but the employment component set a new all-time low (as did the import component), leaving a dismal outlook for Friday's jobs report. As it stands, we now expect fourth-quarter GDP to be revised to -6.5% from -6.2%, with a 5.0% decline still likely for the first quarter.
Standard & Poor's Ratings Services
Through a combination of actions, AIG will reduce its obligations under the current $60 billion lending facility from the Federal Reserve Bank of New York (FRBNY). We expect that this will provide the company with the flexibility to continue its asset-disposition plan at a more measured pace.
Although in our view the actions of the U.S. government have largely eliminated the risks of further rapid deterioration in the company's creditworthiness, intermediate-term concerns about the company's ability to retain key staff and market profitable new business remain. AIG expects that the planned sale of the life operations, which we believe likely, will take longer than originally planned, partly because of the lack of liquidity in the capital markets. As a result of these medium-term risks, the outlook is negative…[which reflects] our view that increased pressure on the performance of AIG's insurance businesses is likely. We believe AIG is particularly susceptible to these broader market trends given its somewhat weakened position. Although at this point we have not seen clear evidence of long-term damage to AIG's franchise, there have been widespread reports that competitors are actively pursuing AIG's accounts and key underwriting personnel.