Calvert News & Commentary

December Market Commentary: Equity Markets Finish Strong in 2009


Untitled Document

By Natalie Trunow, Chief Investment Officer, Equities
Calvert Asset Management Company, Inc.

Natalie Trunow, Head of Equities Natalie Trunow,
CIO, Equities

Equity markets were relatively quiet in December, as 2009 drew to a close. The CBOE Volatility Index (VIX) dropped to levels not seen since the latter part of August 2008, just before the Lehman Brothers’ bankruptcy. Even the Senate’s passing of landmark healthcare legislation on December 24th failed to impact the market strongly. For the month, equity markets slowly drifted upward, within a narrow trading range. For the month, the S&P 500 Index rose 1.93%, while U.S. small cap and international markets were up 8.05% (Russell 2000 Index) and 1.45% (MSCI EAFE Index), respectively.

In December, economic news and market sentiment continued to improve—an indication that economic recovery is progressing. During the month, investors absorbed another dose of inconclusive-to-slightly positive economic data. For starters, GDP growth for the third quarter turned positive for the first time since the second quarter of 2008, reflecting increased consumer spending due in part to the cash-for-clunkers program, increased net exports helped by a weaker U.S. dollar, and marginal improvements in the residential housing market supported by government stimulus.

The manufacturing sector continued to lead the recovery, with industrial production increasing 0.8 % in December. Consumer data was also more encouraging, with preliminary retail and food services sales figures for November up 1.3% from the previous month and 1.9% better than the previous year, and the Conference Board’s Consumer Confidence Index® rising for the second time in a row in December. The quarter ended on a tentatively positive note, with initial claims for unemployment benefits for the short week ended December 26th declining by 22,000 to a seasonally-adjusted 432,000—the lowest level in 18 months.

But not all the news was positive. Dramatic downturns in the sovereign creditworthiness of Greece, Spain, and Dubai rattled financial markets briefly. Commercial real estate loan delinquencies and defaults were hitting new highs and are expected to grow, negatively impacting insurance companies and regional banks which may require additional TARP funds. Executives in the service industry, which accounts for almost 90% of the economy, were forecasting additional job cuts for 2010.

Looking forward, we believe that December’s economic reports confirm that the U.S. economic recovery is on track but is likely to be more protracted than the market originally expected, with consumer demand slow to recover and manufacturing providing a larger portion of the economic growth than usual.

Despite many encouraging signs that we may be starting to recover from what is now a two-year long recession, some still place a high probability on a double-dip recession which, if it transpires, is likely to send riskier assets into another tailspin. We do not see this scenario as highly likely, but it is still possible, given the weakness of the consumer and service sectors. At the other end of the spectrum, a V-shaped recovery seems less likely, given the relatively weak demand story. The more likely outcome seems to be a gradual, smile-shaped, slow economic recovery that may prove to be more robust in the long run.

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