Source: www.spdrs.com

Domestic economic health. January saw a new President, and a new optimism in the land … but it wasn’t prevalent on Wall Street. Unemployment jumped 0.4% from December to 7.2%.¹ Other December indicators were pretty depressing: consumer spending down 1%, personal incomes down 0.2%.² Retail sales fell 2.7% in December, consumer prices fell 0.7%, and producer prices fell 1.9%.^3,4 We also got word that fourth-quarter durable goods purchases had declined 22%.⁵ House Democrats worked to craft a massive stimulus plan for President Obama, and there was talk of creating an aggregator bank to buy up toxic securities. Rescue efforts were clearly getting underway, but they would take some time to have an impact.

In February, these plans were further implemented and articulated, as investors worried anew over the stability of major thrifts. The $787 billion stimulus package became law, including payroll tax cuts of $400 for individuals and $800 for couples.⁶ The White House also dedicated $75 billion to help homeowners without equity and homeowners who couldn’t make mortgage payments (and another $200 billion to Fannie Mae and Freddie Mac to get the program started).⁷ The President proposed a federal budget designed to cut the $1+ trillion deficit to $533 billion by 2013, including a $634 billion health care reserve fund … and the restoration of the highest tax brackets back to 36.0% and 39.6% and the capital gains tax rate to 20.0% in 2011.⁸ Investors anticipated big news from Treasury Secretary Tim Geithner, but his proposed revision to the bank rescue plan presented few details and inspired little confidence. The federal government devoted another $30 billion to shoring up AIG in exchange for preferred stock shares, and rescued Citigroup in a deal that gave Uncle Sam 36% of the bank’s common stock.⁹

Things turned brighter in March, and the markets had an outstanding month. Treasury Secretary Geithner introduced the Public-Private Investment Program, in which pension funds, insurance firms and other long-term investors could buy up illiquid securities with a combination of private money and federal loans awarded through auctions.¹⁰ The Federal Reserve said it would buy up to $300 billion in Treasuries and $750 billion more in mortgage-linked bonds.¹¹ CEOs of Bank of America, Citigroup and JPMorgan Chase informed the press that their thrifts were profitable in January and February.¹² The Financial Accounting Standards Board talked seriously about relaxing the mark-to-market rule, another good sign for the banks. Indicators improved in the housing and manufacturing sector (see below) and the Conference Board and Reuters/University of Michigan consumer confidence indexes rose slightly.¹³

The drama of the month: the future of General Motors and Chrysler. At month’s end, President Obama gave GM 60 days and Chrysler 30 days to severely restructure or lose their chance for further federal money. Chrysler was given 30 days to partner with Fiat. Could GM and Chrysler avoid bankruptcy in the coming months? Americans hoped so.¹⁴

Global economic health. Let’s look at the latest statistics from the European Union. Eurozone unemployment hit 8.5% in February, nearly hit a three-year high; in March, the Eurozone manufacturing sector contracted for the tenth month in a row. February factory orders in Germany, the EU’s top economy, were down 49% year-over-year from 2008 levels – and that economy is heavily export-driven. Some analysts think EU unemployment could hit 11% by 2010. ¹⁹ While some economists expected the European Central Bank to cut interest rates by half a percentage point at the start of April, the ECB chose only a quarter-point cut to 1.25% and delayed decisions on other tactics.²⁰

New data from Asia suggested major economies were a long way from recovery. In March, the Bank of Japan’s monthly survey of business confidence hit its lowest level since the survey’s inception in 1974. Exports fell each month of the quarter in South Korea, making it five straight months without a gain. A key purchasing manufacturers index in China was under 50 (showing contraction) for the eight month in a row.²¹ In March, the Asian Development Bank forecast only 3.4% growth in developing Asia for 2009, compared with 6.3% in 2008. The ADB’s chief economist believes the recession may make Asian nations expand their economic bases and reduce dependence on exports.²²