FINANCIAL AND INVESTMENT PLANNING
If you were to look at your May letter, which showed selected numbers through the end of April, and then compare them with the numbers on the first page, I believe you might be surprised by the differences.
As I mentioned last month, investor sentiment changed in late April. Whereas the tilt of the economic expectations had been positive earlier in the year, the Greek debt crisis served as a tipping point. Investor sentiment took a decidedly contrary/negative turn.
Consequently, in the second calendar quarter, the Dow Industrials dropped 9.7%. That’s the worst slide for the April-June stretch since 2002. The index was off 12.8% from its April high.
The S&P 500 fared worse. It lost 11.96% in the quarter and dropped 15% from its April high. The NASDAQ suffered a greater loss of 12% during the second quarter.
As fear increased, Treasury prices rose and yields fell. At the end of June, according to Barron’s, longer maturity securities dropped to yields not seen since April 2009. The yields on short term notes fell below the level reached during the worst of the financial crisis of late 2008. The two year Treasury slipped below 0.60% for the first time. This confirmed the views of market watchers who believe the Federal Reserve, when it says they will maintain low interest rates for an “extended period.”
I believe investors’ sentiment became so negative in late June, that the 5% rise in the first week of July was inevitable. It seemed impossible to find a commentator/expert who was bullish. Investors were net sellers of stock funds and buyers of bond funds. I could just feel that extreme bearishness. In my 32 years of experience, that is when stock market rallies occur.
When you step back from the daily headlines, not much has changed. Unemploy-ment is high, and is likely to stay that way for some extended time. Residential real estate is in bad shape, and foreclosures continue. Commodities, when you look at the indexes, are faring worse than stocks. Gold and bonds, where people turn in the times of risk aversion, have posted positive returns.
The last 3 years have been amazing. According to Barron’s we have experienced a 57% waterfall decline in stocks in 18 months followed by an 80% rally in 13 – and now a 15% decline in 2½ months.
The May-November period is frequently a weak one for equities. Given the uncertainty of the global economic outlook, this pattern could easily be repeated in 2010.
However, I am always reminded of what I have learned from equity portfolio managers. Market timing requires two correct decisions – when to get out and when to get back in. I can assure you that no one was encouraging investors to load up on stocks in March 2009, the exact moment of one of the greatest buying opportunities of at least a decade.
This investing business is a humbling one. Know your goals and objectives.
Understand what we have learned from the academic field of behavioral finance. We experience a 10% gain as a 10% gain and we experience a 10% loss as a 20% loss. Also, the financial press, whether print, broadcast, or online has one goal – to get people to pay attention to them. Consequently, the more extreme and strident the commentary, the more we pay attention. In my experience, things are never as good or as bad as they are reported to be. I suspect you may have similar experiences.