Don’s Outlook 11/21/08
The markets contended with more dire economic forecasts and some renewed trouble in the financial sector, causing the S&P 500 to sink to a decade-low level this week; the index has now lost 50 percent of its value since its October 2007 high. This decline not only exceeds the 1987 crash, but it is in line with the bear market fall between 1973 and 1974. Given that equity valuations were lower this time than they were during each of those two periods, has the market gone beyond predicting a normal recession to something much worse economically?
Stocks now offer the highest dividend yield versus interest rates in 50 years—the yield on the 10-year Treasury is trading lower than the S&P 500 dividend yield—this market action, if not already overdone, is most certainly approaching oversold levels.
I continue to focus on those concerns that have weighed most heavily on stocks in recent months—the dislocations in the short-term credit markets, the uncertainty of corporate earnings, the presidential election, the forced liquidation of mutual funds and hedge funds—because these are problems that have either improved or resolved themselves this month.
Furthermore, the latest economic data this week supports a fall in consumer prices, the biggest one-month decline since 1947, in fact, when records began. The stunning reversal in energy prices was the root cause of the turnaround, while other prices across the board declined in tandem. These reductions will provide Americans with a much needed stimulus.
There is a lot in the news about hedge funds unwinding large complicated positions involving leverage and other risky investments. This, combined with institutional buying of Treasuries, means that there is an enormous amount of cash on the sidelines that will be deployed once the market stabilizes, setting the stage for a powerful rally that could erase much of what the market has lost this year.
This week, along with account representatives, I have continued work with new and existing clients to devise a portfolio that suits their time horizon and tolerance for risk. It is imperative to stay focused on the long term. We are working with some of the most experienced fund managers in the business, and I am confident that together we can weather this storm.
I am finding that more and more of my new clients have moved away from the large-firm models dominated by banks and brokers with their sales and product-driven processes, because they prefer the independent and objective approach that we bring to financial advisory matters. If there are family members or associates within your network that you feel could benefit from our services, I would be happy to have a preliminary discussion with them. In the meantime, I would like to wish everyone a very Happy Thanksgiving!
