Don’s Outlook 2/13/09
After stumbling on Tuesday’s disappointing announcement from Treasury Secretary Timothy Geithner, markets rebounded. A small gain on Wednesday was followed by a sell-off on Thursday morning, but markets rallied back into positive territory. The gains weren’t enough to reverse all of Tuesday’s losses, however, so in the past week, the market has dropped 1.3 percent.
Lifting the markets was news that the Obama administration was working on a plan to reverse foreclosures. From a low of 808 points, the S&P 500 Index rallied to close at 835, a gain of 3.3 percent. Today, Citigroup and J.P. Morgan said they will temporarily halt foreclosures until the Treasury Department releases its plan, which may take several weeks.
Positive retail data didn’t affect shares yesterday. January sales increased 1 percent, which was a pleasant surprise, even though it was met with skepticism. Today, U.S. consumer confidence numbers for February revealed a public that believes the recession will last at least a year, and “nearly two-thirds anticipated that the downturn would last five more years.” Retail data showed that many of the areas increasing in sales are needs rather than wants, which suggests that consumers are acting on their beliefs. Whether sales fully reflect that belief is a separate question, but it’s hard to see how consumers can become more negative in their thinking—a positive sign in an otherwise bleak report.
This leads me to my main points for today: the market turns when you least expect it to turn, meaning recoveries can come as quickly as sell-offs do. According to research provided by Ibbotson and AllianceBernstein, most stock returns during the 1970 to 2008 period came from just 48 out of 468 months, or 10 percent of the time. Capturing the best 48 months meant a 9.6 percent annualized return, while missing them resulted in no gain at all and inflation eating away the value of your principal.
What previous bear markets have taught us is that patience is a virtue. Holding onto your investments has traditionally been a better long-term strategy than selling into weakness. We only need to remember March 2003 or October 1974 to know that five years later, each of these bear-market bottoms returned 72.6 percent and 118.0 percent, respectively.
