The Value Line Investment Survey

ECONOMIC AND STOCK MARKET COMMENTARY

Few tears will be shed at 2008’s passing— at least from an economic perspective. That’s because the old year, which began with a business slowdown, is ending with the nation caught in the grip of its most severe economic downturn in a generation. The recession, which has taken a toll on the housing, auto, retailing, and industrial sectors, may push the gross domestic product down by 5%, or more, in the now-ending quarter.

Little near-term relief is on the way. Our sense is that the problems on the consumer and industrial fronts, which so heavily penalized the fourth quarter of 2008, will continue to a large degree during the early months of the new year. True, the worst of the recession and the most severe drop in quarterly GDP might soon be behind us. Yet, with no strengthening in prospect for the major consumer or industrial markets, it is possible that the economy may post GDP declines that average 2%-4% during the first half of the new year.

The Federal Reserve continues to act aggressively, by not only reducing interest rates, as it did again on December 16th—when it cut a key lending rate from 1.00% to a range of 0% to 0.25%—but also by pumping increasing sums of money into the financial system in an effort to facilitate lending among the nation’s banks. It is the Fed’s hope that the lower borrowing costs and the added monetary infusions will promote home buying and boost business spending. This will be a slow process, however, which is why we are very cautious about the first half of 2009.

We are also taking a somewhat cautious view about the second half of 2009. Although it is possible that the recession may run its course by mid-2009, it is unlikely that we will see much growth in the third or the fourth quarters. Increases in GDP may be small, at best, until 2010.

Investor resilience is impressive. The stock market has rallied in recent weeks, even as the recession has deepened and the turmoil and uncertainty in the auto industry has increased. Should the buying on bad news continue, or even if the market only stabilizes as the recession drones on, the confidence that we have made a long-term low in stocks will increase.

Conclusion: These signs may suggest that the long bear market may be approaching its end—if it has not already done so—since major moves in the stock market often precede changes in the economy by six months or so. Please refer to the inside back cover of Selection & Opinion for our Asset Allocation Model’s current reading.