Financial Market Review

From the desk of
Matthew A. Faltys

Here is our monthly commentary on the Financial Markets as they stood at month end, October 2008.

The financial markets have been more complex than ever as the month of October 2008 came to a close and the results of the 2008 Presidential Election are known. The stresses that started building in mid-September continued in October 2008, forcing all capital markets to experience widespread and emotional selling. For the first time we can remember, all of the major asset class indexes that are tracked - domestic stocks, international stocks, investment grade bonds, high yield bonds, gold, real estate investment trusts and commodities - were lower for the month.
Positive trends, while few, did exist. We saw lower commodity prices helping to reduce costs for individuals and businesses. Also, most major domestic stock indexes saw gains in the last few trading days of October, extending into early November. Newly elected politicians will certainly have their work cut out for them to balance their pre-election agenda with post-election realities as a series of events unfolded that changed the U.S. financial market landscape forever. These events included:
1. Lehman Brothers declared bankruptcy on September 15th, with the aftermath affecting the safety of money markets and the two remaining investment banks - Morgan Stanley and Goldman Sachs.
2. Morgan Stanley and Goldman Sachs were both granted commercial banking status on September 21st - forcing both to begin to curtail their lending and trading operations to comply with banking guidelines.
3. Economic reports in early October showed that U.S. consumers started sharply pulling-back spending in September.
4. In early October, many hedge funds announced that they would have losses in the third quarter. They began selling to prepare for both the quarterly redemptions from clients and because capital, that hedge funds rely on to operate, became less available.
5. Individual investors got rattled and began pulling their investments from mutual funds. TrimTabs estimated that $71 billion fled U.S. mutual funds in September alone, three times the monthly record previously set in 2001. (Bloomberg.com, 10/31/08)
6. A selling tsunami developed that affected stock, bond, commodity and currency markets.
7. Policymakers and central banks around the world began to inject combined trillions of dollars of liquidity, investments and guarantees into the credit markets and commercial banks.
8. Global central banks began cutting benchmark interest rates in an effort to support economic activity.
9. Preliminary third quarter U.S. gross domestic product showed a 0.3% decline - the first decline since 2001, led by the weakest consumer spending performance since 1980.
10. U.S. Democrats took control of the White House and Congress for the first time since 1992 in the early November elections.
From an economic perspective, this was certainly not a pretty picture for Wall Street or Main Street. Demand fell for Main Street and U.S. stocks had their worst monthly performance since October 1987. The U.S. economy is likely in recession, with the UK and Europe to follow. Many overseas stock markets fared worse than the U.S. in October 2008.
This nasty credit cycle is not yet over, but policymakers are being proactive and creative to bring it to an end and get global economic activity moving again next year. If they succeed, it is important to remember that stocks usually move higher well in advance.

Market commentary provided by Fifth Third Private Bank. This information is current as of the date of this letter and the opinions expressed are subject to change at any time, based on market and other conditions. This information is intended for educational purposes only and does not constitute the rendering of investment advice or specific recommendations on investment activities and trading. The mention of a specific security within this letter is not intended as a solicitation to buy or sell the specific security. Index performance shown within this letter is not representative of any Fifth Third managed account. Indices are unmanaged and do not incur investment management fees. The S&P 500 Index is a composite of the 500 largest companies in the United States. The S&P 500 Index is unmanaged and does not represent the performance of any particular investment. The MSCI World Stock Index is a market capitalization-weighted benchmark index made up of equities from 23 countries, including the United States. The indices are unmanaged, do not represent the performance of any particular investment and you cannot invest directly into these Indices. Past performance is no guarantee of future results.

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