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Economic momentum can hardly get worse. Investors appear obsessed with growing unemployment. However, on average, unemployment lags the economic cycle by five months and the S&P 500 by nine months, meaning we should see improvements to the stock market even as unemployment rises. The two charts below show the lag effect of US unemployment relative to economic growth and trough earnings in the S&P 500.



Although economic data has been once again disappointing over the last few weeks, the Economic Surprise Index has stopped deteriorating. Additionally, there are tentative signs that momentum for some lead indicators might be improving, such as US Jobless Claims, Consumer Confidence, the Baltic Freight Index and the Philly Fed Index. The Credit Suisse Composite Lead Indicator Index may have also stopped deteriorating as the charts below suggest.



With the beginnings of base building in sight, (though we may have a long base building process lasting two years) many investors are beginning to ask how they can hedge themselves against the print- and-spend policies now being unleashed by Congress. The question going around is, “how do we hedge our personal wealth against inflation?” The answer is dividend paying equities linked to earnings momentum. However, until we see signs of lift off, the probabilities are high that we will remain in a range bound market for the next several quarters; much like the 1970s. Note on the following page the length of the two range-bound periods of the S&P 500. Both periods of focus, 1969-1979 and 1999-2009, are clearly range bound. Clearly, President Obama will spend the majority of the first 100 days of his administration focused on creating an economic environment capable of restoring the market to the high end of the trading range.



To the extent to which a plan to turn the economy can be facilitated by government, it will rest upon the capacity of Congress to ease credit conditions. America’s consumers and businesses are far too reliant upon lines of credit to survive a continuation of the present lock up (very tight lending conditions) of the banking industry. At some point, even with bailout money, the banks will need to rethink their defensive strategies in order to survive the negative spiral now affecting all balance sheets. Perhaps the banks need more incentive. According to Reuters reporters, (Bohan and Ferraro, 1/27/09) President Obama’s aides are looking for ways to help struggling homeowners in order to stem the banking crisis in America. However, beyond the stimulus package expected to be signed by the President in February, bailouts remain unpopular.

Contact us to learn more about working with Vaughn Woods Financial Group.

Best Regards,

Vaughn L. Woods, CFP®, M.B.A.

*Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views off Delta Equity Services Corp. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0032

**Marketedge.com, Pershing NetExchange Pro, Bloomberg, Credit Suisse