It’s Déjà Vu All Over Again
—Yogi Berra
Summer 2008
Summer is baseball and the 4th of July.
I love the 4th not only for its historical meaning,
but also because we Americans celebrate it exuberantly with great parades, fireworks and family picnics.
The shimmer though on this year’s celebration of our nation’s founding was somewhat less brilliant
than in recent years largely due to the Job-like performance of the stock market in June.
You have to go back to 1930 to find a June on par with 2008’s.
So it was not surprising to hear late in the afternoon on July 3rd that the
Dow Jones had officially slipped into Bear Market territory.
My head nod to Yogi above, is a reference both to the past and the possible future outcomes from where we are now. This is not the first Bear Market (greater than 20% decline) in history nor will this one last forever. Our most recent Bear was in full throes 6 years ago in July of 2002. And while there were a few choppy months left in that cycle, in no less than 9 months the market reversed course and headed up for the next 5 years.
While the pain of these market declines is real and felt by all, it’s important to remember that making emotional decisions based on reactions to short term market dynamics is usually not rewarded in the long-term. So in News, I offer factual analysis of the economy and the markets; in Commentary I provide advice for both your plans and your investments based on your needs and a balanced view of what the short and long term future might look like. Bringing you perspective is really what this Yogi-ism is all about. The stock market will not go down or up forever and, yes Yogi, we have been here before.
News
The headlines have been replete with stories of soaring oil prices and the sounds of crashing financial institutions, not to mention the evil-twin plots of recession and inflation. Really smart guys everywhere have tucked inside their shells with the excuse that they have never experienced such a multi-faceted, complex crises with so much uncertainty. So much for the good news! As with all good stories, this one too needs a villain. It’s tough competition in the bad acting department, but I think Big Oil gets the Academy’s nomination. My Fall 2006 newsletter commented on how gas prices had dropped recently from $3.00/ gallon to under $2.10 (No - that’s not a typo gang). It’s two years later and $4 bucks– what gives? Is it purely supply and demand or is it commodities traders helping their clients hedge against higher costs? Or are media-driven fears of higher and higher prices a self-fulfilling prophecy? I would wager that no one on the earth knows the answer, but that we are in an oil bubble, I am sure. This excerpt from Schwab’s MarketEdge analyst, Mark Huard gives us some positive insight:
“Oil is up approximately 50% in 2008, a tremendous gain by any standard. As recently as early 2007, oil exchanged hands at $55 per barrel. That makes oil’s present rise meteoric during the past year and a half. And, there appears to be no end in sight. Goldman Sachs is calling for oil to peak as high as $200 within the next six month to two years. Nobody sees oil falling.
Well, almost nobody. The contention here (at MarketEdge) is that oil is in a classic bubble and when it breaks, it will break for good. That doesn’t mean a return to $50 oil but it does mean a return to an orderly and normalized market at lower prices. A bubble is an upward spike in asset prices that takes place at rates of change that, by definition, are unsustainable.
History is full of bubble examples, big and small. The Dutch tulip mania of the 1600’s and the U.S. stock market crash of 1929 are two of the most famous bubbles. The NASDAQ climbed from 3000 to 5000 in four months between November 1999 and March 2000 is another. Eight years later, the NASDAQ trades near 2300, far below the ending price level of its “dot.com” bubble. Housing, which many Americans had come to believe was an investment that only went up in price, is in the midst of a national multi-year downward adjustment after its bubble popped.
Oil fits the mold to a tee. An asset that used to have its moves measured almost glacially now moves like a high tech stock. Its 155% move since early 2007 is far in excess of worldwide rates of inflation and dwarf the corresponding percentage increase in the global demand for oil. While it is dicey to try to call tops and bottoms, it is probable that either we are in the final blow-off phase of the oil bubble or we are on the verge of entering the final blow-off stage. Once achieved, the oil market will require a few months to sort itself out and arrive at a true price for oil going forward.”
I agree with Mr. Huard’s assessment and believe that the “dot.oil” bubble implosion, when it comes, will have a positive effect on the dollar, the markets and for our wallets.
Commentary
This Commentary is more about some of the actions we are taking in your portfolios in response to this bear market than it is Commentary. One of the things we are not doing is “getting out of the market” because that by its very nature implies that there is a point when one “gets back in”. This is called market timing and the chart below details why timing is a loser’s gambit:1
While not timers, we are not unaware that at certain points in market cycles, it may make sense to make adjustments to your plan - not gutting it and thereby leaving the portfolio powerless to benefit from a recovery when it does happen. I cannot tell you precisely where we are in the Market Emotion cycle chart2, but I think we have some way to go before reaching the point of “maximum financial opportunity”.
Therefore it makes sense in many portfolios to take the following steps:
- Replacing positions that have had good “upside” history with more defensive players,
- Shedding underperformers that may also have tax benefits at this point in the cycle,
- Raising cash above normal target levels, and
- Increasing foreign bond and equity allocations where appropriate.
These approaches represent some of the tactical moves we may use to help your portfolio through this period. They are not strategic changes to your specific asset allocation. However, please contact us if there are any changes to your financial goals or investment approach that would require a change to your strategic allocation.
We appreciate your patience and loyalty in this challenging market environment. Please do not hesitate to contact us if you have any concerns or questions. Thank you for your continued patronage.
Ideas
An idea and goal I have had for a number of years came into reality last month with the hiring of a new employee. A number of you have already met our new team member Evan Bedel. Actually, it’s kind of hard to miss Evan who played college basketball at Wittenberg University. Evan’s role as Support Advisor strengthens our commitment to provide you with the high level of service you’ve come to expect from us. I encourage you to read Evan’s bio and to introduce yourself next time you are in the office.
Gregory T. Busch, CFP
Clarus Financial, LLC
1 Panic Is Not a Strategy—Nor Is Greed, Liz Ann Sonders, July 1, 2008 *Measures returns of investors in equity mutual funds. Source: Bureau of Labor Statistics, DALBAR Quantitative Analysis of Investor Behavior 2007 (www.dalbarinc.com)
2 Chart source: Westcore Funds/Denver Investment Advisers LLC, 1998
This newsletter and the ideas expressed herein are my own and is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any security discussed herein.
Information and any statistical data contained herein is obtained from other sources which we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All opinions expressed and data provided herein are subject to change without notice.
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Newsletter Archives
Autumn 2008 »
Maximum Optimist
Summer 2008 »
It’s Déjà Vu All Over Again
Spring 2008 »
March Madness
Winter 2008 »
Year In Review 2007
Autumn 2007 »
Roller Coaster Ride ’07
Mid-Summer 2007 » A Mid-Quarter Briefing From Clarus Financial
Summer 2007 » Mission Accomplished
Spring 2007 » Our Interests May Not Always Be The Same
Winter 2007 »
The Year In Review
Autumn 2006 »
FILL’ER UP
Summer 2006 »
Summer Doldrums?
Spring 2006 »
Presidential Cycle: market indicators for an uncommon 2nd term president