The equity market hemorrhage, it seems, has spilled over into the new year with losses observed pretty much across the board. Sector wise, the hardest hit continues to be financials, followed by industrials as a distant second. Amongst the least affected are the traditional defensive sectors including healthcare and consumer staples but other cyclical sectors such as consumer discretionary are not too far behind! In other words sector rotation doesn't seem to be paying off in this instance as markets seem to be giving mixed signals about the extent and severity of the recession. In all fairness, the period (less than a month) is just too short to give a clear indication. If we add this years performances to those of last year, things look very different, with a clear demarcation between defensive and cyclical.
What about the bailout scheme? With the amount of money that has been pumped into the system we should be anticipating an eventual rebound, and the "forward looking" nature of the stock market should make it amongst the frontrunners in signaling a change in the cycle. But nothing like that is happening, at least for now because the money that is being thrown to banks is not it seems being used for lending purposes but rather to improve their sickly balance sheets. The TED spread, or the spread between LIBOR and U.S. Treasuries, although having narrowed significantly since right after Lehman's bankruptcy still remains too high to factor in a recovery. Just as in previous cycles, the downturn was driven by a financial sector that lost control of the complex derivative instruments that it unleashed into the markets, and just like in previous recoveries, a change in the business cycle will take place once the banks find themselves in a more solid footing, financially speaking. We don't see that happening anytime soon as it requires that banks fix their balance sheet problem (forget earnings) which will take a tad more than just receiving money from the government.
