What a difference a year can make. I was reviewing the third quarter Market Commentary of 2008 written October 14, 2008. As I reflect on this current time period, it is amazing to see how far the Market went down, how much it has recovered – and how much more we have to go.
In the third quarter, the Market continued its momentum from the positive second quarter. On October 14, 2009, the Dow closed above 10,000 for the first time in over a year. Considering the Dow closed in March 2009 at less than 7,000, the turnaround has been swift and somewhat unexpected. In our Commentary, we will review some of the events that contributed to this gain but take a look at why we may not be completely out of the woods.
Statistically speaking, 2009 is shaping up to be a great year. For the second quarter of 2009, the S&P 500 index was up 15.9% (total return), making it the best quarterly performance in 10 ½ years (BTN Research). We followed this up in 3rd Quarter with the S&P 500 Index going up another 15.6%, taking its year-to-date number to 19.26% (Morningstar). While again on paper it looks like a very good year, this comes after the “Great Recession” of 2008 where the S&P 500 was down 37% (Morningstar) as well as the Dow's highpoint in October of 2007 when it peaked above 14,200. So, on paper it looks good but the real question that everyone has been asking is where do we stand now and what can we expect going into the fourth quarter and 2010.
The easy answer to the above is that we are in a much better position today than we were 12 months ago. The analysts are suggesting that a lot of the turnaround is a result of government intervention. Whether you agree or disagree with some of the actions the government made, the President believed he needed to react. We are all aware of the $787 billion dollar Economics Stimulus package but you may be surprised to learn that the government implemented 17 different types of systems designed to help the markets, banks, and consumers. These programs are one of the main reasons that we have seen a once floundering Market flourish. Specifically, the S&P 500 from March 9, 2009 through October 2, 2009 has increased by 51.5% (BTN Research).
While the effects of the government involvement have translated into positive market results, we are expecting a slight shift over the next few quarters. The Fed has “over communicated” that they will pull back on liquidity, or in essence, begin to wean the Market and businesses from its involvement. Our expectation is that when this occurs, the Market will struggle. We expect that volatility will increase, and with the pull back of liquidity, we anticipate that the equity markets will adversely be affected.
So for those of you who are reading this Commentary, you are probably wishing that you weren’t. But as we stated earlier, we are in a much better position than we were 12 months ago. The adjustment that we anticipate taking place in the Market will be smaller and last much shorter than we have previously experienced.
As we have discussed in previous commentaries, there are two distinct factors at work during a recession: the Market and the Economy. The Market typically rebounds 6-9 months before the Economy does. We have seen the Market begin to heal itself but we need to position ourselves for the Economy to follow. Presently, we are still in a recession. The current unemployment rate in the US is 9.8% which is the highest that it has been since 1983 (Department of Labor, BTN Research). With the expected slowdown of the Market, we anticipate unemployment to exceed double digits as we enter 2010. One of the main roots of the Market and economic problems remains with the banking industry. For well over a year now, the bank’s lending practices have remained in a holding pattern. This lack of forward motion has had an enormous impact on the residential real estate market and more recently on the slumping commercial real estate market. While I am pleased with the bounce-back the Market has experienced, I am somewhat surprised at the volume that it has done considering the ongoing freeze by the banking industry.
So now that participants’ accounts have come back - but knowing the Market may go backwards - the next question we will be hearing is “what should I do with my account”? The answer is to remain calm and to make sure that you are well positioned in the Market. We will continue to say it - Stay the Course. It always makes sense to check your account to ensure you are invested in the right investments. I would caution anyone against changing his or her risk strategy because it may ultimately adversely affect your account. Remember that your account is for the long haul, you want to maintain a well-diversified portfolio, continue to contribute, and dollar cost average.
One of our greatest concerns over the past few years has been participants who panicked. We had some participants who had major losses in 2008, decide early in 2009 that they could not take the volatility anymore and sold their equity positions very close to the Market’s low point and moved into cash. They locked in their loss and have been on the sidelines while the S&P 500 has recovered and gained more than 50%.
As we are approaching the end of 2009, we encourage you to take a look at your account and see how it is invested and performing. I have been surprised by the number of participants who have told me they have either recovered their losses or are very close to doing so. Many participants will be excited to see their third quarter statement. This is also a great time to consider increasing your deferral percentage. By doing so, 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.
Latest Updates & Information
The story about the U.S. economy remains positive. Unemployment seems to have reached a trough just below 4% while not leading to horribly negative effects on productivity, and showing mild wage inflation, concentrated in certain areas of the economy.Read full story here