Dear Clients:
It is now the spring of 2009, and the U.S. as well as the world has been in recession for well over a year. The bear markets, which originated in the U.S., have now reached 18 months with a severity that has not been seen in over 30 years.
One must remember there is a difference between capital markets and the economy. Capital markets tend to be a very strong barometer of economic weather; they show a decline typically 6-9 months ahead of an economic downturn and similarly tend to recover 6-9 months before a recovery takes hold. The capital markets have been in decline for 18 months, making this one of the longer bear markets on record. That having been said, from March 6th through April 6th of this year the S&P 500 has rebounded over 22%. There have been 10 recessions since World War II, of which only 4 have had equal or longer bear markets: 1968 = 18 months, 1980- 1981 = 20 months, and 1973-1974 = 21 months. An exception was the last recession of 2000- 2002 in which the bear market was elongated to 31 months exacerbated by 9/11. Only time will tell if we have seen the bottom of this market.
The economy is unequivocally in recession, but not to the severity that was experienced in either 1973-74 or 1980-81 when looking at GDP declines and unemployment rates. However, the severity of this bear market is approaching some of the most virulent returns we have seen. For only the second time in 72 years, the S&P 500 was down 37% and the MSCI World Ex USA index was down 43% for 2008. Although those numbers are distressing, historically these pronounced selloffs provided the foundation for above average stock market returns going forward. Most quixotically, the 1930s have been associated with some of the worst periods in capital markets’ performance. But, that period also saw some of the best one year returns on record. For example, 1933 is not typically identified as a high-reward year, but it was one of the 5 years in the last 184 where returns were above 50%. In 1933, there were returns between 50- 60%; in 1935 returns were between 40-50%, and 1936 returns were between 30-40% depending on the market capitalizations observed.
Volatility can be unsettling when witnessed on the downside. But, historically these windows provided an opportunity for patient investors to acquire assets at attractive prices, leading to the quote from one of the sages of the past, Sir John Templeton. Even though it’s more than a decade old, it is still timely: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” One would hardly argue that our nation is feeling a bit pessimistic these days.
Sincerely,
David W. Demming, CFP®