Interesting document on the market and where we are.

1. QUICK MARKET UPDATE
Up the Down Escalator
Dean Junkans, CFA®, The Private Bank Chief Investment Officer May 7, 2009
I was working out on the stair machine at the gym the other day and the thought occurred to me that
what I regularly do on this piece of exercise equipment is basically the same as going up a down
escalator. Yes, quite an insightful and useful analogy for the economy and financial markets. In some
respects that is what the stock market has been doing in recent weeks—it, too, has been walking up a
downward-moving escalator. We have seen a significant market rally off the March 9, 2009 lows amidst
an economy that remains weak. The market has been climbing the ’wall of worry’ constructed around
concerns about the financial system, government-mandated stress tests, layoffs, and the threats of
another swine flu (aka H1N1) pandemic. So why have we seen a return to optimism, even though the
economy remains in recession? To answer that question, I think it is worth considering those parts of the
economy that may be heading up the down escalator.
Some of most notable areas in which the economy continues to travel downward include employment
and, to a lesser degree, manufacturing and services. Although the labor market continues to weaken,
with some 5.1 million jobs lost since the recession began in December 2007 and no clear end in sight,
we may be nearing the bottom of the escalator (or, in this case, the top of the down escalator) in both
the manufacturing and services sector. The Institute for Supply Management (ISM) reported that, while
still showing contraction (indicated by a reading below 50), its manufacturing index rose to 40.1 in April,
from 34.1 in March, its slowest pace of decline in six months. The ISM’s service sector index also
declined at its slowest rate for seven months. 1 As these numbers indicate, signs that the economy is
gaining a more stable footing over the past few weeks are starting to emerge, both domestically and
globally—much like if you spend enough time on a stair machine, your legs grow stronger.
Another clear example of this phenomenon is Gross Domestic Product (GDP), the measure typically
used for measuring overall domestic economic activity. The preliminary first quarter GDP headline
number was weaker than expected, contracting a reported 6.1 percent, following a 6.3 percent
contraction in fourth quarter 2008—suggesting that GDP remains firmly headed down the escalator.
Digging a little deeper, however, the primary reason for the greater than anticipated decline was that
companies shed inventories at a record pace. Companies trimmed stockpiles at a $103.7 billion annual
rate in the first quarter 2009, the largest drop since record keeping began in 1947. 2 If this precipitous
drop in inventory stockpiles is excluded, the contraction in GDP would have been substantially less than
expected due, in large part, to signs of a pulse in the consumer sector. Consumer spending, which has
been on a downward spiral for more than a year, actually increased 2.2 percent in the first quarter,
heading up the escalator as inventories headed down. Although on the surface the inventory drawdown
1
Bloomberg, 5/5/09
2
Bloomberg, 4/29/09

2. was a negative for economic growth, such strong de-stocking is likely to prove positive in the coming
quarters. Since inventories went in the opposite direction of consumer spending, companies will likely
need to replenish them, lifting the economy as demand gradually improves.
In other signs that the economy is beginning to strengthen its recovery legs, consumer confidence and
housing are showing daily signs of stabilization. These are two very important factors to watch, as they
may determine whether the consumer sector of the economy persists in its recovery. The University of
Michigan reported that its index for consumer confidence climbed to 65.1 in April, up from 57.3 in March,
representing the highest rating since September 2008, and the largest one-month increase in more than
two years. 3 Earlier this week the housing market also started to show some signs of life, and pending
U.S. home sales rose more than forecast for the second consecutive month, while construction spending
rose unexpectedly in March, after five straight months of declines. 4
On another positive note, non-financial corporations, unlike consumers, went into the recession with
generally stronger balance sheets than they had going into the 2000-2002 environment. The market’s
expectations for corporate earnings had fallen so low that a full 68 percent of companies exceeded
these overly pessimistic estimates for the first quarter, a figure much higher than normal. 5
These glints of “green shoots” may suggest that the economic freefall that occurred late last year into
early 2009 appears to be easing with each passing week. In our view, one of the biggest factors that
likely will lead to an eventual recovery in the economy is the speed at which critical parties already have
reacted and adjusted to this economic pullback. Companies cut costs and adjusted inventories at a
record pace; consumers, not used to adjusting at such a rapid pace, actually changed their behaviors at
an amazing speed, and governments around the world rapidly responded with massive stimulus
spending—maybe not always done correctly, but undeniably quickly.
In the meantime, the legs underlying the economy appear to be stabilizing and gaining a little muscle
tone, setting the stage for positive economic growth later this year or early in 2010. This resurgence may
be precisely what is needed to restore investors’ confidence in the market. To that end, our next Quick
Market Update will examine the importance of staying on the playing field and the value of a tactical and
strategic asset allocation strategy, no matter how quickly you feel that the down escalator is moving.
3
Bloomberg, 5/1/09
4
Bloomberg, 5/4/09
5
Bloomberg, 5/5/09

3. Disclosures
Wells Fargo Private Bank provides financial products and services through various affiliates of Wells Fargo & Company
(WFC).
The information and opinions in this report were prepared by the Investment Management arm of Wells Fargo Private
Bank, a division of Wells Fargo Bank, N.A. (WFB). Information and opinions have been obtained or derived from
information we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent WFB’s
opinion as of the date of this report and are for general information purposes only. WFB does not undertake to advise you
of any change in its opinions or the information contained in this report. WFC affiliates may issue reports or have opinions
that are inconsistent with, and reach different conclusions from, this report.
Past performance does not indicate future results. The value or income associated with a security may fluctuate. There is
always the potential for loss as well as gain. Investments discussed in this presentation are not insured by the Federal
Deposit Insurance Corporation and may be unsuitable for some investors depending on their specific investment
objectives and financial position.
This report is not an offer to buy or sell, or a solicitation of an offer to buy or sell the securities or strategies mentioned.
The investments discussed or recommended in the presentation may be unsuitable for some investors depending on their
specific investment objectives and financial position.
Some complementary strategies may be available to pre-qualified investors only.
Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of
investment losses.