Dealing with Market Weakness
March 10, 2009
Since our last market update, February 9th, stock markets worldwide have taken a turn for the worse. The excessive leverage in our nation’s and the world’s households and institutions created a painful and timeconsuming mess which is much more difficult to clean up than anyone anticipated. US and global stock markets are posting very weak results for 2009 on the back of weaker-than-forecast economic data, poor corporate earnings, continued instability in the banking sector, disappointing policy from Washington, and more shocking scandals from Wall Street.
Over the past 15 months, we have managed portfolio allocations with a defensive bias and have committed limited amounts of new capital to stocks. These actions partially mitigated portfolio declines, while unfortunately not avoiding all losses. At this point in time, and with limited ability to know when the stock market will bottom, we believe additional actions may be required for some clients to protect against the possibility of further, material market downturns.
At current valuations, stocks hold significant upside potential. We are therefore not in favor of completely abandoning allocations to stocks at the present time. Historical market results have consistently shown tremendous returns in the early phases of market recoveries. However, given the limited ability to predict when a sustainable recovery might begin, and with other investment opportunities showing greater stability and positive returns at the present time, we believe modest allocation adjustments to pursue these opportunities is warranted.
During the next couple of weeks, you will be hearing directly from us to discuss your current portfolio allocations, investment holdings and any allocation changes that we have effected on your behalf. We have always customized and personalized portfolio policy to the unique circumstances of each family we serve. While we attempt to use our best ideas in every client’s strategy, we temper the amounts allocated to each based on personal risk tolerance, portfolio objectives and investment horizon.
The goals of our adjustments will be threefold. First, we will do all that we can to prevent further significant erosion in wealth. Second, we wish to introduce additional investments to asset classes that are currently exhibiting positive behavior. And third, we want to consolidate holdings into what we believe are the best positions to participate as much as possible in an eventual stock market recovery.
The road ahead will likely require more frequent portfolio actions to protect wealth and then to enhance it. Remember, stock markets can move quickly in either direction, and they start their recovery months in advance of positive economic news. We continue to believe in the long-term potential for stocks notwithstanding recent, historically-significant declines. We expect volatility to remain high over the next several weeks and months as markets digest the impact of policy decisions on the economy. And we believe a sustained market recovery will come when greater stability arrives in the real economy. Therefore, we advocate maintaining some allocation to stocks even if the markets decline further from current levels.
The past 18 months have been emotionally stressful for all of us. We simply want things back the way they were as soon as possible. The keys to dealing with such times are flexibility, objectivity, and faith.
- Patience is a virtue and, in the words of President Lincoln, “this too shall pass.”
- The mainstream media bombards us daily with doom and gloom which we overcome by reminding ourselves that, for these profit-challenged news outlets, crisis sells and fear drives ratings. Recall the great tech bull market of the late 1990s during which these same pundits were writing about a “new paradigm,” the permanent end to the business cycle, and “must have” IPOs (initial public offerings)…all of which ended badly.
- Investors tend to project their current situation indefinitely into the future. When times are good, we cannot see their end. Conversely, when times are tough, we cannot see the return of good times.
- The American system and its people are resilient. We may at times drift off course, but we always find ways to come back stronger.
The road ahead is likely to have good days and bad, and the path to recovery may be long and hard. With each passing day, we are one step closer to what might become the next great secular bull market. It will no doubt look different than the previous one—they always do. But the foundation laid by our forefathers more than two centuries ago works well to flush out bad policy and inefficient resource utilization, and that architecture will again show its brilliance and efficacy. Good news will gradually replace bad until, on some non-descript day, the market will show an unexpected rally that at first will be met with widespread skepticism but go on and on. This first rally will in retrospect be recognized as the inflection point when the trend went from decline to incline, leading to the next era of expansion and prosperity.
We would like nothing more than to provide you with an exact prediction when this inflection point will occur. Unfortunately, neither we nor anyone else can know this. Instead, we assure you that we are looking for the market turn and will be ready to act when it happens.
We thank each of you for the trust you place in us. We do not take that responsibility lightly. We do what we do because we enjoy serving you and will always give it everything we have. In these difficult days, we remain hopeful, faithful, and optimistic that better times will come again. The hollow gains and very real losses of the over-leveraged past will eventually be replaced with true growth in the economy and in family wealth. And the lessons learned during this period will serve to strengthen our foundation for the future.
The final chapter of this story has not yet been written.
Jack E. Payne, CFA
Chief Investment Officer
Michael Joyce, CFA, CFP
President & CEO