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Thanksgiving Greetings

(November 26, 2009)

Important Note: We will not be publishing a commentary this weekend, as this author will be taking this weekend off to celebrate Thanksgiving!

Dear Subscribers and Readers,

I want to wish all our subscribers in the U.S. a great Thanksgiving Holiday!  Thanksgiving travel is expected to set records this year.  No doubt there will be airline glitches and (some) drunk driving – so above all, I want to wish all our subscribers a happy and safe Thanksgiving.  The weeks surrounding Thanksgiving last year were especially traumatic.  At the time – while we recognized the implications of the financial crisis – we also struck a reassuring tone.  Indeed, this unprecedented “adjustment” in the global housing market and financial sector was long overdue, given the tremendous speculation that was taking place and the general “crowding out” of the global talent pool by the financial sector away from other (and arguably more productive at the margin) sectors such as the basic science, technology, biotech, and education sectors.  Moreover, while the major stock market indices made a lower low in early March, many major consumer discretionary stocks actually bottomed in November and have since outperformed the S&P 500 by significant margins (especially retail, restaurants, and casino operators).

The S&P 500 consumer discretionary sector is the second best performing sector (out of the ten economic sectors), rising 51.9% over the last 12 months.  The best performing sector was information technology, rising 62.3%.  The third best performing was materials, up 51.4%.  The worst performing sector was utilities, rising just 2.3%, while the telecommunications sector – the second worst performing sector – rose 6.2%.  As for the major stock market indices, the S&P 500 rose 29.5% over the last 12 months, while the Dow Industrials rose 23.4%, the Dow Transports 17.1%, the NASDAQ Composite 48.6%, and the Russell 2000 33.6%.  Not surprisingly, “growth” stocks outperformed “value” stocks (the latter of which was heavily weighted in financials), with the Russell 1000 Growth Index rising 41.0% and the Russell 1000 Value Index rising 23.1% over the last 12 months.

Subscribers who remained invested were able to benefit from one of the greatest stock market rallies since the rallies off of the July 1932 and the December 1974 bottoms.  That said, the weeks leading up to the 2009 Thanksgiving Holidays have not been fun times, especially for those who have lost their jobs or those whose family members and friends have lost their jobs.  At this time last year, weekly initial unemployment claims (please see chart below, courtesy of just topped the 500,000 mark.  Initial unemployment claims would rise another five months – topping out at over 650,000 in April.

Initial Unemployment Claims (thousands)

For the week ending November 20th, initial claims finally declined back to below 500,000 – as it declined 35,000 to 466,000 initial claims for the week.  Obviously, 466,000 new claims is still high, as this number tends to be at the 300,000 level during non-recessionary periods.  In addition, new claims peaked at 517,000 in the previous recession, and actually fell to just 428,000 within a month.  But based on the performance of the stock market as well as the major global/US economic leading indicators (including residential investments, money supply, etc.) initial new claims should continue to fall into the end of the year and most probably well into 1Q 2010 (the National Retail Federation is projecting “Black Friday” shopping to increase 16% from last year's).  Sure, the unemployment rate will remain at double digits as US consumers continue to deleverage and as more people rejoin the US labor force (the unemployment rate in Los Angeles is now at a whopping 14%!), but as long as global policy makers work together and do not tighten monetary/fiscal policies prematurely, there is light at the end of the tunnel (and it's not the light of an oncoming train).

Even within the investment management labor force, there is light at the end of the tunnel.  A small minority of mutual funds (mostly on the fixed income side) and hedge funds are now hitting their previous “high water marks,” and is starting to dip their toes back into the labor market.  Assets in U.S. retirement accounts (including assets in public and private defined benefit plans), in particular, have staged a remarkable comeback.  As of 2Q 2009, total U.S. retirement assets stood at $14.4 trillion (see below chart, courtesy of, a full $1 trillion above its 1Q low of $13.4 trillion.

U.S. Retirement Assets

More importantly, I expect total U.S. retirement assets to have surpassed $16 trillion by the end of this year, given the tremendous rally in global financial assets since the end of 2Q 2009, and given the continued increase in the U.S. savings rate since that time.  It took just a year for U.S. retirement assets to surpass its previous high water mark in the last bear market (i.e. 2003).  I expect it to take a little longer this time, but I would not be surprised if U.S. retirement assets hit its previous high water mark by the end of 2010, especially given the attitude change among Americans towards saving as opposed to consuming useless goods such as big-screen TVs (which most definitely detract from U.S. GDP in the long-run).  Unfortunately, the labor market for investment professionals will probably remain tough, given the “overhang” of experienced investment professionals and the ongoing interest in the investment field among many MBA graduates and CFA Charterholders.  In addition, many pension plan sponsors and investors are now seriously questioning the value of active management – especially those who have historically enjoyed a high fee structure and who have added little to no value in the last market cycle.

In the meantime, I want subscribers to be mindful of the divergences we are now seeing on the NYSE Common Stock Only Advance/Decline Line and in emerging markets, especially the underperformance of the Vietnamese stock market (where the country is now experiencing significant capital outflows).  We will cover these issues in more detail after the Thanksgiving Holiday.  Once again, I wish all of you a safe and happy Thanksgiving weekend.  Take good care, everyone.

Signing off,

Henry To, CFA

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