The Markets
The start of 2009 isn’t exactly what the bulls had in mind. With January now in the books and February more than half over, the market bounce from the end of the year is largely gone, at least for now. Following a six week rally off the November lows, the market ran out of steam during January and into early February as the ongoing financial crisis continued to keep pressure on at-risk assets such as stocks, real estate and most commodities. The Dow Jones Industrial Average, which bottomed on November 20, 2008 (DJIA –7552) rallied for the remainder of the year peaking on January 2, 2009at 9034, a gain of 1482 points (+19.63%). However, just when it looked like the worst was over, renewed worries over the depth of the recession along with a surge in lost jobs brought many investors back to reality. The result was a four-week slide which saw the blue chips end the month with a loss of 776 points (-8.8%) closing at 8000 even.
On a percentage basis, the NASDAQ outperformed the Dow for the first time since September as high-tech stocks such as Amazon and Apple came back to life. But the NASDAQ finished January with a loss of 101 points (-6.4%), closing at 1476.
The markets continue to weigh in on President Obama’s bank rescue plan and economic stimulus plan, and the reception hasn’t been good. I should say that the market likes the idea of a plan, but the lack of specifics hasn’t done anything to create confidence that the plan will actually produce meaningful results in the near term. Over time, the proposed stimulus / spending plan / bank recovery efforts are likely to meet with some success, but it appears that the markets are demanding bold, decisive action.
As far as the financial services sector goes, both regional and national banks continue to get pounded. It
appears that using fair-market accounting standards would indicate that many of the nation’s largest banks are technically insolvent. Further, it is becoming evident that absent a suspension of mark-to-market accounting standards (which would potentially introduce even greater uncertainty), several more large banks will require large capital infusions by taxpayers just to stay afloat.
But here are the BIG unknowns: With total world-wide equity having been now cut nearly in half in just over 15 months, has much of the damage already been priced in? Has future corporate earnings power really been permanently reduced by 50%? I’m a textbook skeptic when it comes to the implied promises of free market capitalism (I believe that free markets need regulation and restraint and prudence), but I also believe that future earnings power hasn’t necessarily gone the way of the dinosaur just yet. Given the normal ebb and flow of the markets and the normal boom and bust cycles of the global economy, it is normal and natural and painful for unsuccessful companies to go out of business but it is the way the system works. At some point in the future (distant or not), corporate earnings power will inevitably compound and the market cycle will start over again.
The Appleton Group Wealth Management Discipline TM offers investors the ability to systematically adjust their overall portfolio mix between “at-risk assets” (of all kinds) and “no-risk assets” (of all kinds). During much of last year, all of our firm’s core offerings (Appleton Group PLUS Composite, Appleton Group Tax Managed Growth Composite and Appleton Group Portfolio Composite) held significant positions in cash, fixed income assets, and bear market securities, all of which play their role in helping to minimize the negative effects of2008’s bear market. This year (using exactly the same quantitative research process) we’ve allocated more assets to “at-risk” securities as the market health has largely demonstrated more resiliency. So far this year, we’ve held a minimum of 30% of our firm’s managed assets in equities, which the market has not always agreed with. The rapid deterioration of the economic environment (higher unemployment, sharply deteriorating manufacturing activity, and continued declines in commodity prices) has led to market weakness that has been unwelcome. Adjustments to our current allocations will be necessary in order to bring positions “on the right side of the market.”
As part of a diversified portfolio, our firm’s core offerings continue to be among the most efficient wealth management strategies available in the marketplace today. However, it is important to note that none offer a risk-free strategy for creating wealth over time. All “at-risk” assets present challenges from time to time, as we too have experienced over the past several years. It is for this reason that we strongly advocate using ultra-low and no-risk assets (such as bonds and cash) in any diversified portfolio, most importantly to address the reality that we too may be on the wrong side of the market for a time. Funding retirement income out of these assets is important during periods of economic uncertainty such as these, and buys the investor meaningful time to experience any normal economic recovery and to “refill” these low-risk assets once markets do recover.
Looking Forward
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 six 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 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 far as the new administration goes, the challenges are daunting and the learning curve has to be short. Treasury Secretary Geithner’s fiasco last week has badly shaken global markets that are looking to Washington for proactive leadership on a host of economic issues. Lesson learned, and it is unfathomable that the next series of announced financial initiatives will demonstrate the same level of vagueness that the Secretary’s first foray into the deep did. The “devil is in the details” as the saying goes – here’s hoping that the details are forthcoming.
