As we turned the calendar from 2008 to 2009, I think we would all agree that we could not get the New Year started fast enough after experiencing what was the most devastating year in the Market. In this Market Commentary, I will recap the "Wild Wild West" year that we had and discuss what lies ahead for 2009.
When looking back at 2008, it was a situation where if it could go wrong, it did go wrong. The S&P 500, an unmanaged index consisting of the 500 largest publicly traded companies, finished the year down 37% - the worst record in 77 years since 1931 and the Great Depression. During the 4th quarter, the Market was down 21.9%, making it the worst quarter in 21 years. Of the 500 stocks in the S&P 500 Index, only 26 stocks, less than 0.5%, were up while 168 stocks, or 33%, were down by at least 50%.
In looking at 2008, it will certainly be remembered for its volatility. During 2008, the S&P 500 Index had 28 trading days that had a gain or loss of at least 4%. Compare this to the calendar years from 1983-2007; the S&P 500 Index had exactly 28 days in total that the Market had a gain or loss of at least 4%. In addition to the Market volatility, we saw extremes when it came to oil and gas. The price for a barrel of oil peaked at $147.27 on July 11th, and then closed the year at $44.60, for a swing of $103.00. A gallon of gas peaked at $4.11 nationally on July 16th and closed the year at $1.62.
The real story of the Market in 2008 was the fall-out from the housing crisis, which as it advanced, progressed to the banking and ultimately the financial markets. Throughout the course of 2008, the Federal Reserve reacted very quickly by significantly reducing interest rates. Their strategy was that by reducing rates, they would make it cheaper for consumers to borrow money, which would ultimately spark the Market and the economy. What was not taken into consideration was the real estate inventory and willingness or unwillingness of the banks to lend money. The reality of the situation was that the banks were still trying to fully understand their tens of billions of dollars of write-offs. As a result, the banking industry came to a virtual standstill.
In October, the President and Congress passed a $700 billion dollar Economic Relief Package (ERP). The basic goal of this ERP was to help the banks get back into the banking business. The first time the ERP was presented it failed which led to the financial markets tumbling further. Due to the severity of the situation, Ben Bernanke, Federal Reserve Chairman, stressed that if the ERP did not pass, we would approach financial levels that had not been seen since the depression. After revisions were made, the ERP was presented again and this time it passed. The next few days the market seemed to respond pretty well. Unfortunately, we are now discovering that there really was little to no guidance on the actual distribution of those funds. The government distributed about half of the $700 billion dollars to the banks, and the banks basically pocketed the money to help them improve their disastrous balance sheets. The result is that even though the ERP was passed, the Market still tumbled 21.9% in the fourth quarter because the monies stayed with “Wall Street” instead of filtering down to “Main Street”.
Where do we go from here?
According to Horizon Investments, LLC, an independent third-party investment advisor, the Market is in a “Trough Year”. In this trough year, they forecast that the Market will get worse but will bottom out and then will have potential for rapid growth. The worse will include dismal earnings reports from publicly held companies and a continued increase in unemployment. The expectation is that we are going to see unemployment increase to somewhere in the neighborhood of 7-8%. What we are focusing on within the near future, is what the Obama Administration will bring to the table and how quickly it will do so. A lot of the Market’s downward momentum can be traced to the lack of consumer confidence. With the new administration, I believe there is an overall sense of renewed faith and confidence. Living in Cleveland, and being a Cleveland Browns fan, I would call it the `confidence of a new season’. Each year, regardless of the previous year, the belief runs high with our beloved Browns that this is going to be the year. As this faith remains true to our football team, the country is placing a lot of hope upon the shoulders of our new President to get us back on track. In the words of our new President, Barack Obama:
“This is the journey we continue today. We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished. But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed. Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America.”
Our message to plan participants remains the same: stay the course with your investment strategy. A question I am often asked is, “How much worse can it get?” Unfortunately, I do not have a crystal ball but in looking at the economic and market indicators, I can say this. Our belief is that the Market will hit its bottom within the next 90 to 150 days. At that point, we begin the road to recovery. Historically, the Market recovers 6-9 months before the economy recovers. With the belief that the bottom is near, an interesting statistic to be aware of is that in the last 8 bear markets, from the low point, the average gain was 36.5%.
Every year Pension Advisors develops an Education Campaign for all of our retirement plans. Our campaign for 2009 is titled “Rise Up”. We came up with this theme because we want to support and encourage all of our participants to face the challenges of the Market and to persevere through them. For much of 2008, I have seen more emotion from participants than I have ever seen in my 18 years in this industry. By sticking with the investment fundamentals that we talk about, and by taking the emotion out of your overall investment decisions, we will all recover from this time period. The way to turn these lemons into lemonade is to stay the course and invest in the long-term confidence of our great nation. Even with the dismal year of 2008, the S&P 500 Index’s cumulative return for the last 50 years ending 12/31/08 was a positive 9.2%.
As I have said in the past, we want you to understand that we are riding the waves of the Market with you. We will get through this upheaval in the Market and come out stronger on the other side. While anyone can be your Advisor when times are good, during the bad Market times, we want you to know that we are here for all of you as Plan Participants. We are available at anytime either via email, phone or in person to review your account, and to make sure you are well positioned for whatever lies ahead for 2009 and beyond.
I wish you all great health and much success in the coming year.
Latest Updates & Information
International Markets continue to be the most favored area of investment for the first quarter of 2018 and looking forward for the next 12 months. The best performing asset class in Q1 was emerging market.Read full story here
Recent allocation changes have yielded good results in 2017. A greater exposure to International Equities turned out to be timely. There is still room for normalizing this allocation if you have not done so yet.Read full story here