Market Update

Confidence Building Needed
January 22, 2008

On January 7^th, we posted an update suggesting that the odds of a recession were at least 50% and rising. Moreover, we expected the stock market (S & P 500) to decline at least 20% from its high point October 9, 2007. At that time the market had dropped 9% from its October high. Subsequently, the market has fallen more than six percentage points further. We continue to believe the market will fall 20-25 % before bottoming and having additional portfolio liquidity as we recommended January 9^th remains a good idea.

Global markets fell sharply over the past three days as worries about the U.S. entering a recession reverberated from country to country in Asia and Europe. Technically, most of these stock markets had already peaked and had begun to fall. Additional concerns about the U.S. economic situation were literally the “straw that broke the camels back”. Fundamentally, of course, many foreign markets have weakened in the past on fear that the U.S. consumer would be buying fewer imported products. Recently, some market observers have been saying that this linkage would be broken this time. Unfortunately, the link between the growth of overseas economies, especially Asian remains strong, hence the panic behavior in global stock markets during recent days as concerns about U.S. consumption have increased.

Markets are built on confidence. The behavior of markets in recent months reflects declining confidence as well as fundamental and technical concerns. For five years through last May the confidence of investors increased. Of course, rising confidence in continuing growth brought reduced concern about risk. Now with risks more apparent, confidence in markets has declined. A cyclical swing in confidence is normal, but a continuing secular rise in confidence is not as we are finding out each day.

Loss of confidence significantly increases the probability that policy makers will intervene with monetary and fiscal policies designed to foster renewed confidence. The 75 basis point cut in the Fed Funds rate today before the Fed’s scheduled meeting marks a significant shift in the conduct of monetary policy and reflects the growing gravity of the U. S. economic situation.

Concomitantly, the Treasury Secretary in a speech this morning stressed the need for quick and significant fiscal stimulus. Nonetheless, the stock market defied expectations with a lethargic rally, suggesting how depressed confidence is. Confidence building will come eventually, but it will take more policy actions on the part of the U.S. and foreign governments. All recognize the acute need to support some degree of growth. Not doing so and allowing the U.S. to lapse into recession would likely exacerbate credit pressures. Meanwhile, markets will remain quite volatile as they seek signs of stability in something, somewhere.

Patience and some degree of liquidity are needed to advantage oneself for value opportunities in the months ahead. Bear markets always provide the optimal opportunity to buy the best quality assets at the best prices.

A. Marshall Acuff
Managing Director
Chair, Cary Street Partners Investment Committee
Cary Street Partners Investment Advisory, LLC