The Road to 2009

Last week we saw the VIX index of fear continue to decline. 2008 had plenty of volatility in the markets and each new crisis brought on new fear. The year seems to be ending a little calmer as oil has declined, the dollar has dropped, interest rates have headed toward zero, the credit markets have rallied a little, and stocks are well off their November 21st lows.

We expect this week to be relatively quiet as many traders on Wall Street will be happy to close the books for 2008 and take some time off from the fury. If credit spreads continue to tighten, the stock market may also bring some holiday cheer.

We are still quite concerned with the fragility of the financial system, rising unemployment, weak housing, soft commercial real estate markets, and a weak business environment. Unemployment will keep rising and the consumer savings rate will also dramatically increase from very low levels. Higher savings means less consuming. This is a viscous cycle that needs to run its course. The stock market will eventually see the light at the end of the tunnel but the tunnel is very long this time. Expect some bear market rallies but not much good news on the economy. In three to five years, large, liquid, well capitalized companies will be stronger, larger and produce good stock market returns but the short-term could be a rocky ride.