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Member FINRA/SIPCPage 1 of 3
Jeffrey Kleintop, CFA
Chief Market StrategistLPL Financial
v4
LPL FINANCIAL RESEARCH
Weekly Market Commentary
Although the S&P 500 is down 6% so far this year, it remains solidly withinthe range it has been in over the past three months. We expect that thestock market may remain range-bound over the next 100 days or so, but wehave noted some positives amid the gloomy economic reports:Credit markets continue to heal – corporate bond credit spreads have
narrowed, mortgage-backed bond spreads have also narrowed, corporatebond issuance over the past two weeks was the strongest in eightmonths, LIBOR has narrowed to Treasuries, and commercial paperactivity has increased.Volume is returning to the market and volatility is subsiding. Even intraday
volatility is down. The 5-10% intraday swings have subsided as buyers andsellers are coming closer to agreeing on a fair value price for stocks – asign that fundamental analysis, rather than panic, is beginning to return toWall Street.The number of advancing stocks less those that are declining on the NYSE
remains on an uptrend reflecting more signs of health even as the overallindex remains in the bottom half of the trading range. This suggests thatit has been a relatively small number of stocks (Financials are down 22%this year) weighing on the index recently.These positives are balanced by the challenges in the weeks aheadincluding the fourth quarter earnings reports and the gloomy economicdata on employment, consumer spending and manufacturing. In addition,the new president faces many challenges and his response will shape theperformance of the markets.That said, the next 100 days we will likely see a flurry of legislative activitythat may impact the markets. While this may include market-movinglegislation making it easier to unionize and expand the State Children’sHealth Insurance Program (including a tobacco tax hike), the most significantpiece of legislation in the next few weeks will be the fiscal stimulusprogram. It may bolster confidence in the economy and markets or it mayfall short and disappoint the market by not being put to work quickly enough.Most of the priorities on the spending and tax stimulus have been
communicated. The initial stimulus will be about $800 billion over twoyears, with about a 70/30 breakdown between spending and taxes.Spending will go toward infrastructure, aid to state governments, andmore benefits to unemployed workers. The main component of the taxcut will come as a refundable tax credit for most workers to be deliveredthrough lower payroll tax withholding.There has been a lot of talk from policymakers in recent weeks about
what changes in the bank rescue plan Obama will pursue. Last week’s
January 20, 2009
The First 100 Days
Highlights
Following on the heels of the inauguration the next100 days will likely be a flurry of legislative activitythat is likely to impact the markets. We expectthe stock market may remain range-bound overthe next 100 days or so, but we have noted somepositives amid the gloomy economic reports.The uncertainty and potential for negativeconsequences as a result of new policy actions mayweigh on the market. The last time a President wasinaugurated with similarly aggressive and wide-ranging stimulus plans - it was March 1933, duringFDR’s term, in which the stock market gained about80% within the first 100 days.Beyond domestic concerns, there are manygeopolitical issues confronting the new presidentand congress that may affect the markets includingIran’s nuclear program, tensions between nuclear-armed India and Pakistan, and Russia’s expandingsphere of control, among others.
 
WEEKLY MARKET COMMENTARY
LPL Financial Member FINRA/SIPC Page 2 of 3
moves to inject more capital into Bank of America and guarantee assets,the mortgage “cramdown” restructuring at Citigroup, and the Senate’sfailure to reject the second half of the TARP programs $700 billionsuggests an increasingly active response with the potential for some formof nationalization for some banks, an increase to the size of the TARP, anda return of the plan to purchase distressed assets from the banks.Obama is likely to propose measures to help the housing market;
however, how aggressive they will be is unknown. Targeting lowermortgage rates through purchases of agency mortgage-backed securitiesand explicitly guaranteeing GSE debt, giving financial assistance tohomebuyers, using TARP money for foreclosure relief, and changes tobankruptcy laws are possible.There may be a focus on protectionist policies and others that weaken the
dollar in order to encourage aggressive policy actions to address the crisisin Europe and Asia rather than allowing those nations a free-ride on theU.S. stimulus program.Notably, the Obama team economists have projected that the stimulus
program will boost GDP by 3.7% over two years and result in thenet creation of 3.7 million jobs by the end of 2010 resulting in a peakunemployment rate of 8%, not too far from the current 7.2%.Uncertainty and potential for negative unintended consequences of thepolicy actions may weigh on the market. I think it is worth looking back tothe last time that a President was inaugurated with similarly aggressive andwide-ranging stimulus plans - it was March 1933 in the midst of the GreatDepression. In 1933, FDR’s spending drove the budget deficit to 7.8% ofGDP. In 2009, the Congressional Budget Office estimates that Obama’sdeficit spending will total an even larger 8.3% of GDP. During the first100 days after his inauguration, a record number of bills were passed incongress. In addition, he addressed the banking crisis through guaranteesby proposing deposit insurance. During the first 100 days of FDR’s term thestock market gained about 80%.Beyond the domestic concerns, there are many geopolitical issuesconfronting the new president and congress that may affect the markets:Obama has made it clear he intends to follow General Petraeus’ surge
strategy in Afghanistan. The intention is to increase the number oftroops in Afghanistan and intensify the pressure on the Taliban to giveup more militant elements. This may result in the inclusion of the Talibanin a coalition government similar to the strategy in Iraq with the Sunniinsurgents. The potential for a wide range of outcomes in this first thrust ofObama’s foreign policy may impact markets.President Obama has reiterated publicly that he intends to engage Iran.
Obama said there would be a “a new emphasis on respect and a newemphasis on being willing to talk, but also a clarity about what our bottomlines are.” In mentioning clarity on the bottom line, Obama signaled thathe would continue the Bush administration’s policy on opposing Iraniannuclear weapon development. Obama appears to be signaling a shift inapproach to Iran without changing policy goals. What will Obama offer theIranians in return for their compliance?
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Healthy Trend 
Cumulative Advance-Decline Line for NYSE 
Source: Bloomberg, LPL Financial Research
50000450004000035000300002500020000150001000050000
Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09
 
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