What a ride! Although it was not anything close to resembling the kind of fun that I seek out of life, you have to admire the dynamics at play during the last quarter. It was the first quarter in the history of the S&P 500 that the index experienced a complete bear market(declines of 20% or more) AND a complete bull market (a rise off of the bottom by 20% or more. History in the making. So after posting new twelve year lows early in March, stocks rebounded for the remainder of the period as both the Dow Jones Industrial Average and the NASDAQ posted monthly gains for the first time since last July. After a 973 point (-11.7%) decline during the month of February, the Dow started March by losing an additional 515 points (-7.3%) over the first five trading days of the month, closing at 6547 on March 9th.In the midst of some of the darkest days for the markets in a generation, the blue chips turned on a dime finishing higher on nine of the next thirteen days, closing at 7924.56on March 26th a full 21% gain from the bottom. According to the Wall Street Journal, the surge marked the fastest 20% rebound from a bear market low since 1938. For the month, the Dow gained a healthy 545.99points (+7.7%), closing at 7608.
On a percentage basis, the NASDAQ outperformed the Dow throughout March led by the semiconductor stocks and the large tech names. The NASDAQ also closed at a high for the year on 03/26/09 (NASDAQ – 1587.00) before falling back as the quarter came to a close. For the month, the NASDAQ gained 150.75 points (+10.9%) to close at 1528.59. It was the best monthly percentage gain for the NASDAQ since November 2002.
For the record books, as of March 31st the Dow is still down 13.3% for the year while the NASDAQ has lost a modest 3.1% of its value.
Certainly, a market rebound that follows a bear market is much better than the other way around. And there are a number of bright spots. First, the declining trend durable goods orders and manufacturing activity is flattening out. This is good enough for now, and needs to happen before the trend line can start to point upwards. Second, the long-awaited plan by the Obama administration to address toxic assets on bank balance sheets is finally starting to take shape. Mist and vapor and other hard-to-grasp generalities by Tim Geithner are not as valuable as a solid plan from his office. Thirdly, there is a bit more flexibility being offered in account standards as it relates to assets on bank balance sheets. This too should help to at least make it appear that financial institutions aren’t in as dire condition as they appear to be. Lastly, spring has almost arrived in northeast Wisconsin, and that can’t hurt sentiment one-bit.
The Appleton Group Composites™
After a really strong year of outperformance in 2008 (relative to the markets, that is), the current market environment is a bit more challenging to say the least. I’ve always said that volatility is fine and welcome and useful so long as it is sustainable. Sustainable trends are wonderful – they allow us to participate in market advances and to generate all kinds of capital gains. Sustainable downward trends are also wonderful for our discipline because they allow us to reduce risk during their early emergence (by reducing exposure to at-risk assets) and to buy back the same investment vehicles at deep discounts. This is so much better than less flexible ways of managing money (think “buy and hold”) which by their nature will participate in all of the sustained declines to the point of insanity. But the kind of volatility that we witnessed during the recent quarter is exactly the kind of volatility that isn’t helpful at all. Short, punctuated, violent market moves in short periods of time can (and will) generate periods of time in which we are either positioned perfectly, and in short order positioned poorly. Great example from the recent quarter: following Tim Geithner’s phantom speech in February, the market went from being down only 4% for the year to being down by more than 25% in just three short weeks. Because we generally use four-six week periods of time to adjust our holdings, we participated in some of the declines, with our managed portfolios experiencing as little as one-half of those losses. With the environment becoming significantly more supportive of equities, we look forward to maintaining a more neutral to assertive posture in equities and real estate and commodities should the trend develop into one that is sustainable.
The opportunities right now are tremendous in an economic recovery scenario, and it is our intention to grab as much of that as we can while still being flexible enough to change our allocations should the need arise. This much is certain: missing out on a bit of potential gains in the kind of choppy environment is certainly OK with us so long as we can participate in a significant portion of an intermediate (or even long-term) sustainable market advance. It is with this goal in mind that we advance our clients’ and our mutual fund shareholder’s best interest over reasonable periods of time.
I would like to reiterate our long-term view of the markets. As I’ve written over the last few months, both the Federal Reserve and the U.S. Treasury will be successful at re-inflating the economy, or they won’t. It’s really that simple, and there is no middle ground. The outcomes for each possibility are as different as night and day, and each must be prepared for prudently. We believe that the Fed’s task should be in preventing further asset deflation, but it is easier said than done. As the price of oil has fallen dramatically over the past nine months or so, so too has corn, wheat, soybeans, copper, steel and practically every other commodity (with gold’s relative stability being noted). This is not coincidental, as the price of each is directly tied to the direction of the dollar (a stronger dollar weakens commodity prices, a weaker dollar increases commodity prices). So far this year, the U.S. Dollar has mostly strengthened as other currencies around the globe have deteriorated sharply. This is most unwelcome, and reflects the dangers of letting the U.S. dollar fluctuate as wildly as it had during the previous eight years. As the dollar may weaken again over the next few years, the likelihood for re-inflating the global economy certainly brightens.
As far as the new administration goes, the challenges are daunting and the learning curve has to be short. Treasury Secretary Geithner’s fiasco last quarter had badly shaken global markets that were looking to Washington for proactive leadership on a host of economic issues. I believe this lesson has been learned, as recent announcements from the new administration have been significantly more detailed. The path to recovery lies squarely ahead, and it will certainly be the goal of the global community to address the steps needed to minimize the likelihood of this type of decay happening ever happening again.