Markets in a Nutshell
May 10, 2010 Issue
“This goes down as one of my five craziest days ever over a 25-year career.” So said stock trader Jeff Shaw as quoted in the 5/7 Wall Street Journal. And we have experienced not only a crazy last 5 days but a crazy year and a half since the financial system near meltdown in the fall of 2008. A drop of 56% in stocks (from the highs of Oct 2007 to the lows in March 2009) and then an explosive 79% rally from the March 2009 lows in just a little over a year. Crazy stuff indeed. So what do we make of all this? Here are a few key points:
1. The extreme volatility we have seen in the stock market over the last year and a half (with the severe losses and then extraordinary gains) are indicative of a stock market in search of a clear direction. The “manic depressive” activity is also a sign we are likely still in the midst of the secular (longer trending) bear market (which we have been in since 2000). A secular bear market is characterized by severe drops and extreme rises in stocks but essentially ends up with stocks in a “sideways” movement over a period of years. The last secular bear market was 1966-1982 (which was followed by the 1982-2000 secular bull market). These bull and bear markets are cyclical. We would all rather just experience the bulls of course but the bears are part of the cycles.
2. As we have written numerous times before, those investors at or near retirement need be careful in these type of stock markets (the secular bear) due to the extreme volatility. A more cautious approach is best for older investors. For those who are younger, these type markets are actually the best time to accumulate and buy stocks (in general). For example, those who were able to accumulate stocks in the doldrums 1970’s stock market, bought “cheap” and were rewarded in the 1980’s and 1990’s. But it takes patience and a strong stomach.
3. The economic shock we experienced (sort of like a massive economic heart attack) in the fall 2008 will take time to heal. While the giant amount of money the federal govt. pushed into the system (on the order of $6 trillion or so so far) did likely stop another Great Depression from happening at that time, the money (much of it borrowed) will have to be paid back and much like the current deleveraging (reduction of debt) of the private sector, will have a drag on growth. So slower growth, slower consumer spending and less credit expansion is likely to characterize our economy over the next number of years. On the plus side, deleveraging, while a painful process, does lead to a much more sound structural economy down the road.
4. So what to do? If you are older, be careful about overexposure to stocks. Most of you who are our older clients are invested a conservative to balanced manner to protect against losses. Income generation from bonds and income producing stocks are key. For you who are younger, hang on. While it isn’t fun watching the markets go up and down like this and your hard earned savings do the same, patience is key. The only reason for the young to panic and bail out of the stock market is if you do not believe we will recover on a long term basis as an economy (and thus stock market).
5. While I would like to tell you that we are done with all the volatility, it probably is not the case. We will continue to watch carefully and for those in our discretionary management programs (such as Road to Retirement, Road to Wealth and MGO Signature) we will continue to try and take advantage of the market volatility and guide you successfully through the turbulence.