Wouldn’t it be nice if March 6 2009 was the bottom of the bear market?
No one can predict the future, but we did have some large positive advances in the stock market on very limited good news the week of March 9th. In fact, since the S&P 500 index hit 666 (yes, that really was the low point for the index earlier this month); it has managed to rise over 10%.
While the future is unknowable, the market gave us some indications about how the eventual recovery may unfold:
- Volatility is still very much present in the equity markets and the recovery may come in large jumps following small catalysts.
- There is a significant amount of cash that was withdrawn from the stock market in the last year and investors appear to be anxious to redeploy it at the first signs of good news.
- The recovery may be as broad as the decline was – the rising tide is likely to lift all boats.
- Being on the sidelines in cash will be a costly mistake for those who have let fear take them entirely out of the stock market. The recovery may come in large bursts that will make timing the point to re-enter the stock market very difficult.
I had been fairly certain that we would test the recent market bottom set in November 2008, at some point in the first or second quarter of 2009. However, I am not convinced that March 6, 2009, will be the ultimate bottom. We are still witnessing the titanic battle between unprecedented government stimulus and a vicious, negative economic spiral. Everyone is hoping the stimulus will bring an end to the recession, but it may not take hold for another quarter or two. Unfortunately, while everyone is hoping that the recession will end, discretionary consumer spending has evaporated and confidence in the economy needs to be re-established.
The good news is that both American consumers and the financial markets are resilient. The best buying opportunities in the stock market are usually the scariest times to be investing. To make this point, Citigroup which earlier this month was reportedly on its way to being nationalized by the federal government, more than doubled its stock price of March 6th over the next six trading days.
The economy has posted some very negative numbers in recent months. As bad as it has been, history suggests that these bad economic numbers are relatively reliable indicators of near-term stock market prosperity. The data to the right provides evidence that financial recoveries are often robust following economic calamities.
10 WORST GDP QUARTERS
10 WORST JOB REPORTS
5 CONSUMER CONFIDENCE LOWS
So what are the current numbers? In February, the US suffered 651,000 job losses – the fifth highest monthly reported total ever. As of March 4th, 2009, the American Association of Individual Investors’ weekly survey of investors indicated that 70% of them were bearish – the highest bearish measurement that they have ever recorded. Clearly, this is a sign that confidence levels are low.
The stock market does not follow a script. There is no requirement for it to post positive performance following bad economic results. However, we are well advised to respect the past. We have had a nice recovery from the March 6th bear market low for the S&P 500 and it would be reasonable to expect that we will finish the year higher than where we are in late March.
Adding additional support to the argument that we may have hit bottom on March 6th is the fact that most economists believe that it takes six to nine months for the effects of a government stimulus package to work their way through the economy. Given that the Emergency Economic Stabilization Act of 2008 was crystallized in the fourth quarter of 2008, its impact should be resonating in the second quarter of 2009. Federal Reserve Chairman Ben Bernanke has gone on record in recent days asserting that the American recession will probably end in 2009 which suggests that recovery is ahead in 2010.
Since the stock market is a leading indicator of the direction of the economy, (and it usually changes direction around 6 months before the economy does), if the recovery for the economy begins in early 2010, it would not be surprising for the stock market’s recovery to begin in the second or third quarter of 2009.
All of these timeline issues will be driven by how successfully the government stimulates the economy through its monetary and fiscal policies. The other critical factor that is harder to measure is the government’s ability to inject optimism and enthusiasm into the economy. The American consumer has always held a significant position in the global economy. If the American consumer remains scared and on the sidelines through the end of 2009, then recovery for the markets and the economy will be several quarters further into the future.
Interestingly, the media has an opportunity to shorten the length of the recession. The reach of the media has never been wider than it is today. Should the media decide to focus on positive stories and signs of economic recovery, optimism can replace the pessimism and fear on the streets and be a catalyst for the recovery. Unfortunately, the media has learned that ratings and sales are higher when there is fear and anxiety related to the financial markets. Perhaps the Obama administration can use its relationship with the media to help shape the coverage in the coming weeks and months. The fact that both Bernanke and Treasury Secretary Tim Geithner have done interviews on national news programs in recent weeks suggests that the administration may be moving in this direction.
Staying conservatively invested and allowing the stock market momentum to increase equity allocations still appears to be the prudent strategy. Real estate’s recovery still appears further away than the stock market’s. While it can be a valuable diversifying component of an investment portfolio, remaining underweight to real estate in the near term should not have any adverse portfolio consequences.
Also, expect inflation to rise. It will not be present in March. It may not arrive in the second quarter. However, the unprecedented stimulus generated though the fiscal and monetary policies of the U.S. government will inevitably lead to inflation later this year or in 2010. To combat the impact of inflation on investment portfolios, positions in Treasury Inflation Protected Securities (TIPS) and commodities will be implemented or increased to their targets during the second quarter. The downsides to these two investments are most likely behind us and the inflation challenges may soon be upon us.
Everyone has their favorite axioms, but “it’s always darkest before the dawn” seems to be most appropriate with respect to the stock market in March of 2009.