What a difference a year makes. In mid-September of last year, Lehman Brothers filed for bankruptcy and precipitated the peak of the financial crisis. The effects were felt quickly. Within a few days of Lehman’s bankruptcy, a money market fund broke the buck and money markets stopped buying the commercial paper of financial institutions. In the following weeks, even the largest and most creditworthy of U.S. corporations were either unable to borrow or were forced to pay handsomely to do so. In the aftermath, the whole financial system seized up. This tipped the sluggish economy into recession and the markets into a tailspin.
It took a year, but growth has returned. The Federal Reserve and Treasury responded to the financial crisis with enormous and unprecedented policy actions to restart the seized up financial markets and restore funding to financial institutions. Eventually, credit markets healed and growth began to emerge. In the past few months, we have seen almost universal signs of growth, with a rise in manufacturing output, retail sales, home sales, business spending, and even IPOs and merger and acquisition activity. But the recovery is incomplete without a turnaround in employment. While job losses have slowed to one-third the pace of the months around the start of 2009 when the effects of the financial crisis were most severe, they have yet to turn positive. While a lagging economic indicator, a turnaround in employment is essential to sustaining the recovery. We expect that despite a rise in the unemployment rate to 10%, job growth will turn positive around the start of 2010.
Despite a more than 50% rally from the low of March 9, 2009, the S&P 500 index has yet to return to the level that preceded the Lehman Brothers bankruptcy. However, it is worth noting that many companies have re-attained their year-ago price level and others are worth more than they were a year ago even though their stock price is lower. For example, Citigroup’s stock price is down 76% from a year ago, yet the market capitalization of the company is higher than it was just before the Lehman Brothers bankruptcy. This is because Citigroup was forced to issue many new shares, diluting the value of existing shares. Other financial companies are also worth more than they were a year ago even though their share prices are lower by about 20%. As a result, the stock market recovery masks the full extent of the healing that has taken place.
While the next 12 months will bring new challenges, the economy and markets have established a solid footing. We look forward to more signs of recovery in the coming months.
This research material has been prepared by LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.