In reflecting on the wild ride we have been on in the market, the analogy that has come to mind is the flight of the Boomerang. "Boomerang" is defined in Wikipedia as a ‘curved piece of wood that travels in an elliptical path and returns to its point of origin’. In this 1st Quarter of 2009 Market Commentary, I will recap the events that have occurred and discuss what we see in the coming months and for the remainder of the year ahead and describe its similarity to a Boomerang.
After experiencing the worst 4th quarter in over 20 years, we began 2009 on a downward cycle as well. However, just as quick as the market went down, it recently has come back up. Specifically looking at the S&P 500 Index, we opened the year at 902.99 and peaked on January 6th at 943.85. Over the next 2 months, the market fell from its January high point to a low of 666.79 on March 6th, which equated to falling by about 30% in 60 days. From this low point on March 6th, the market has surged back up over 30%.
The question at hand is what led the market to its free-fall, and what has helped it recover so rapidly. Many people are also wondering if we have turned the corner, and how long it will take to get back to the market’s all-time high levels of October 2007. While the market over the last few years has been humbling for everyone who studies it, we will make our educated attempt to tell it like we see it.
As we look at all the events that have taken place, the fact is we are living in historic times. While statistically this time period is not at the level of the Depression, it is the worst market seen by all participants under the age of 77. While the events of the market did not occur overnight, they also will certainly not be fixed overnight. The year 2008 could be dubbed the “Year of the Banking Bust and Credit Crunch”. In an effort to spark the market and the economy, President Bush attempted to put through an Economic Relief Package at the end of the 3rd Quarter, 2008. When it initially failed, the market plummeted for several days until the Package was passed on its 2nd vote. Following the passing of the stimulus Package, it became apparent that the details and distribution of the Package had not been carefully planned out. Although some banks received this federal assistance, they ultimately did not pass on these dollars to the consumers, which was the initial intention of the Package. The end result was a worst-case scenario where the market seemed to react as if the Package had not been passed at all and fell by just under 22% in the 4th quarter making it the worst quarter in 22 years.
As we move into 2009, we had the change of Administration. President Obama took office with high approval ratings. While ratings don’t necessarily mean anything to us as consumers, they do reflect on the nation’s confidence in our President. The Administration has some monumental decisions still ahead of them, but they have tried to act quickly. They came out with the $787 Billion Economic Relief Package that is geared more towards Main Street than Wall Street. They have also acted quickly in creating policies for executive bonuses. While there are some extremely critical days ahead with the auto industry, and the many companies that work with and support the auto industry, a lot of analysts believe that the worst days of this current recession are behind us. While it is expected that the recession will likely persist for several more quarters, the rate of the decline has slowed in recent months.
As investors what should our expectations be for the months and years ahead? In analyzing a recession, it is important to know that there are two factors at work - the market and the economy. The market is about 6-9 months ahead of the economy. This translates to the market bottoming out before the economy does. We are seeing that we may have hit the bottom in the market, but there is still a rough road ahead for the economy before the current recession will end. While some significant earnings reports will be released in the new few weeks and months, one of the key statistics in the economy is unemployment. The national unemployment rate is currently at 8.5% and is expected to grow to around 11% by year-end. With these continued high unemployment numbers, we can expect to see wild days and weeks in the market for the foreseeable future.
It will take time for the policies, laws and stimulus packages to have an affect on the economy. In addition, we need to let the run-out or business struggles bottom-out which is expected to take the remainder of 2009 to run its course. Having reviewed the stimulus package, it is anticipated that the majority of money will not arrive until 2010, and with that, we will not see a significant improvement in unemployment until the end of 2010 or even into 2011.
So with what lies ahead, what should we do? While we may sound like a broken record, the answer remains the same – continue to invest and not make rash decisions. In hindsight, it is easy to say that if we knew how bad the 4th Quarter of 2008 would have been, we would have moved to cash and then come back into the market in early March. The fact is what happened in the 4th quarter was a shock to everyone and trying to time the market is a very dangerous game. Like 2002, when some participants finally cried “uncle”, we had several participants in January and February who said “enough is enough” and moved to a guaranteed investment. While this drastic move may have immediately stopped the hemorrhaging, these participants missed out on the bounce-back that has occurred in the last 6 weeks. We will continue to have good days and bad days. The risk is missing the upside return. In studying the past 9 bear markets, we see that the biggest increase occurred in the first 12 months following the “bottom.” We are stressing that you take the emotion out of your decision, and look at the long-term fundamentals of investing in your retirement plan. Even with the disastrous 2008 year, the S&P 500 Index still had an average annual return of 9.2% over the last 50 years ended 12/31/08.
Clearly, these are some crazy, wild historic times we are living in. We will be telling our children and grandchildren about these days and how we got through them. Please remember our motto at Pension Advisors, “It is not our intent to make anyone into an investment or retirement expert”. That is why we are here, and if we can help in any way, please do not hesitate to contact us. We appreciate your continued support.
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