Rally Time

- 2009 2nd Quarter


The world didn’t come to an end after all. Six months ago it seemed the very foundation of modern financial markets were crumbling. Everything you knew about investing appeared to be wrong. So-called experts were saying diversification was dead, defensive investment strategies were decimated, and your mattress was believed to be the safest place to put your money.

Then a funny thing happened in the Second Quarter of 2009. The Market experienced a historic rally. The performance in the 2nd Quarter will go down as one of the best in recent history. The S&P 500 Index ended the quarter up 15.9% and was up 3.2% year-to-date through 6/30/09. All of this has occurred after we endured a disastrous beginning, the S&P 500 Index tumbled down 24.6% from January 1 through March 9, 2009 (BTN Research).

The purpose of our quarterly market commentary is to summarize the events that have taken place recently in the Market and to give some thoughts and ideas on what may happen in the near, and distant, future. The movement of the Market during the Second Quarter of 2009, as well as what we have been experiencing since January 1, 2008, has been unique. We have experienced a lifetime of volatility in a very short time period. Fortunately, we believe the worst is behind us, and we have lived to tell the tale.

For the first time in over a year, we can talk about positive events that have taken place in the quarter. We have spent the last 18 months trying to explain why the market and economy were both doing so poorly, now I get to announce that some underlining indicators have changed for the better. One item that has improved is market volatility. Market volatility has calmed to almost normal measures. One of the measures of volatility is the VIX or the Volatility Index. The VIX at the end of the 2nd Quarter fell to 25, compared to the high point in November 2008 of 80.9. (A normal VIX is about 20.)

In November 2008, the National Bureau of Economic Research informed us that we were officially in a recession (a fact many of us already knew based on personal experience). Now the big question is, when will the recession be over? Historically, the Market starts to improve approximately 6-9 months before the economy recovers. Experts believe that the Market bottomed out on March 6th, and since then has begun its long road to recovery. A participant commented “that even a dead cat will bounce". While I enjoyed the quote, there is more to it than that. I have always been a big believer that when times are good, they are never as good as they seem, and when they are bad, they are never as bad as they seem.

What happened was a cumulative effect of the troubled housing markets, the banks being on lockdown, the Administration’s failed attempt at an Economic Relief package, and interest rates that have bounced around. Now that a lot of this turmoil is behind us, things have calmed down, and emotions have calmed down with it. As a result, we were able to realize that things were bad, but not as bad as we believed, and the Market rallied.

Many participants will be happy to see some positive earnings on their second quarter statements. This should cause optimism, but the optimism should be cautious. Analyzing past recessions shows there is a consistent trend in the recovery of a Market. Even as the Market begins to rebound, the economy still may have months to recover and possibly could get worse. Analysts are predicting that for the remainder of 2009 and into 2010 the economy will get worse. Unemployment, currently at 9.6% nationally, is expected to increase to somewhere around the 12% range by the end of 2009.

Our expectation is that the 3rd Quarter may be a tough one. While the experts say that the Market has priced in the rise of unemployment, as well as the events of the auto industry, with prolonged bad news, it will be very difficult to see the Market move in a positive direction. On top of this, historically the 3rd Quarter is the worst quarter of the year. Everyone is going to take a look at the governmental policies that have been put into place this year and how they are measuring up. Even with the positives that occurred in the 2nd Quarter, our expectations are a lot more modest. We are hoping that we will break – even the 3rd Quarter, but would not be surprised to see the Market drop in the 5% range.

We turn our attention to the average participant who wonders, “Now that the volatility has gotten back to normal, what's a participant to do (and think)?”

Right now is a great time for participants to take inventory of their accounts. While the Market has rallied, many account balances are still down from their high point of October 2007. Having worked with retirement plans and plan participants for a long time, I have come to realize that many participants’ emotions lag the marketplace by a quarter or two. Many will be surprised to hear that things have gotten better. My message, which has been to NOT change your account, remains the same, but for different reasons. If you get out now, you will save a few dollars if the Market goes down in the 3rd Quarter, but you will miss out in the 4th Quarter and possibly beyond as the Market continues to recover its losses.

With the above in mind, this is a great time to consider increasing your deferral percentage into your 401(k). By doing this, you will be buying more shares at a lower price of the mutual funds you are invested in, which will reduce your loss, and put you in a position to be ahead of the game when the turnaround is complete.

If there is anything that we can do to help you achieve your retirement or investment goals, please do not hesitate to contact us. We appreciate your continued support of and participation in AdviseMe!® and look forward to working with you.


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