Market Update
Dwight Johnston
Vice President, Economic & Market Research
The Crown Jewels
The month of February saw the passage of the largest fiscal stimulus package in history and the announcement of the new Administration's effort at stabilizing the housing market. The stimulus program will not provide much in the way of new jobs this year; the true value in the program is in that it will provide enough aid to fund necessary safety nets (unemployment benefits and food stamps). The bill did provide some aid to states, but it fell far short of the mark to prevent job cuts at the state and local government level. We think this bill is setting the stage for "Son of Stimulus" sometime later this year, in which new money will be directed more toward those "big idea" and "big jobs" efforts.
The homeowner stabilization package was an improvement over previous attempts in that it contained real incentives to lenders and servicers to modify mortgages. But a $75 billion package will not cure all ills in the housing market. The bill will help, but the cure lies in prices getting to affordable levels and stabilization in the job market. On the affordability side of the equation, that process is largely complete. Home prices in some areas have actually over-corrected to the downside. The problem really isn't home prices any longer; the problem is jobs.
Given that the Administration did deliver on two of the crown jewels of policy promises, you would think that the stock market would have been able to rebound from an awful January. But in fact, February was worse. The 11 percent decline in the major indexes in February eclipsed the 8 percent January decline. The problem was that the third crown jewel of policy initiatives remained missing. This is of course a plan to stabilize the banking system. New Treasury Secretary Geithner laid an egg in his first major announcement. The "plan" he announced was merely a plan to have a plan.
Since that time, the Treasury Department has announced a program of stress testing of the largest banks and possible capital injections sometime in the next six months. But the details were no solace to a market looking for a final resolution to the banking crisis. In the meantime, the non-banking "black holes" of money, AIG and Fannie/Freddie, are continuing to require and are receiving billions and billions in new support with no end in sight. The uncertainty in the financial landscape is hanging like a black cloud over the markets.
With financial uncertainty as a backdrop, virtually all economic numbers have continued to deteriorate. The Unemployment Rate in California has hit 10.1 percent, and this may be a harbinger of what is ahead for the country as a whole by the end of this year. As I stated at the beginning of the year, I expected the economic numbers to get worse in the first quarter of 2009; but by the second half of the year, the numbers should be improving. By "improving," I don't mean growing. I mean the headlines should be less negative. Perhaps this will slowly start to improve consumer confidence, which hit an all-time low of 25. The big "but" though is some resolution on banks--an absolute requirement. Even if the resolution is some form of nationalization of some banks, that would at least provide some clarity and finality to the banking crisis. But that third jewel in the crown must be found before we can begin a discussion on stabilization and improvement in the economy.
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