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Economic Outlook
January 2009
Stock Markets and the Economy
“Stock markets offer a very useful forecast of the economy.”
Markets are one of the best leading indicators of the
economy
Severe market reactions tend to foreshadow periods of
severe economic stress
Public sentiment may be effectively reflected in market
valuations
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
contained herein are subject to change without notice and are not intended as individual investment advice.
Perspectives on the Stock Markets
“To understand the economy, we need to understand all the forces
driving the markets.”
The “Rational” Side
 Objective situational characteristics: supply and demand
The “Irrational” Side
 Emotional reactions: investor hopes and fears
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
contained herein are subject to change without notice and are not intended as individual investment advice.
Stages of Market Cycles
“Shorter term: likely on the verge of a rally.
Longer term: probably just starting a bottoming process.”
I. Topping Out
II. The Decline
III. A Bottoming Process
IV. A New Rally
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
contained herein are subject to change without notice and are not intended as individual investment advice.
Market Crashes: Lessons from the 1930s and 1970s
“The next few years: painful but profitable!”
M
o n t h ly
Da t a
1 2 / 3 1 / 1 9 2 5
St andar d & Poor 's 500 St ock I ndex - - Tr end Channel
17 37
14 74
12 51
10 62
90 1
76 5
64 9
55 1
46 8
39 7
33 7
28 6
24 3
20 6
17 5
14 8
12 6
10 7
91
77
65
55
47
40
34
29
24
21
18
15
13
11
9
8
7
6
5
4
1 2 / 3 1 / 2 0 0 8
( L o g
S c a le )
L
Tops
K
Public
Optimism
Tops
G
F
E
J
I
Tops
Public
Pessimism
H
“bottoming”
process
B
D
“bottoming”
process
C
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
contained herein are subject to change without notice and are not intended as individual investment advice.
20 05
20 00
19 95
19 90
19 85
19 80
Source: Ned Davis Research
19 75
19 70
19 65
19 60
19 55
19 50
19 45
19 40
19 35
A
19 30
K C P 6 6
-
17 37
14 74
12 51
10 62
90 1
76 5
64 9
55 1
46 8
39 7
33 7
28 6
24 3
20 6
17 5
14 8
12 6
10 7
91
77
65
55
47
40
34
29
24
21
18
15
13
11
9
8
7
6
5
4
Global Themes
“The United States is becoming a much smaller piece of the overall
global economy.”
Effects of a global “savings glut”
 Cheap rates and investment “bubbles”
 Development of the emerging world
 Increased competition
– Facing existing businesses
– For energy and natural resources
– For jobs
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
contained herein are subject to change without notice and are not intended as individual investment advice.
Deleveraging
“Addressing the toxic effects of too much debt.”
Reversing the excesses


More restrictive lending standards
Higher rates to compensate for borrower risk
Will there be voluntary debt reduction as well?
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
contained herein are subject to change without notice and are not intended as individual investment advice.
The Immediate Economic Situation
“Most segments of the economy are struggling.”
Few positives shorter term
 Panicked consumers
 Extremely cautious domestic businesses
 Contracting exports
 State and local governments
 The Federal government will try to take up the slack
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
contained herein are subject to change without notice and are not intended as individual investment advice.
The Coming Months
“Laying the foundation for improvement.”
Recession through the first half of 2009




Consumers will continue to retrench
Layoffs will likely accelerate
Capital spending will deteriorate
Business bankruptcies will mount
Improvement in the second half of 2009
 The financial system should stabilize
 Public confidence will begin to improve
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
contained herein are subject to change without notice and are not intended as individual investment advice.
The Next Few Years
“As with recovery from a massive heart attack,
it will take time for the economy to fully recover.”
Longer-term issues:


Consumers: tight budgets and deleveraging
Businesses: coping with margin pressure
Can we avoid both depression and high inflation?



Federal deleveraging?
Social Security and other retirement obligations
Retiree health care
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
contained herein are subject to change without notice and are not intended as individual investment advice.
Contacts
Bruce McCain, Ph.D., CFA
Chief Investment Strategist
Key Private Bank
[email protected]
(216) 689-5042
David Reavis
Public Relations Manager
Key Private Bank
[email protected]
(216) 689-7622
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
contained herein are subject to change without notice and are not intended as individual investment advice.
Disclosure