In Like a Lion...Out Like a Lamb
That old phrase about the weather in March could roughly describe the experience of most of our clients in the final month of this quarter. After precipitous declines in both January and February, the domestic stock market reached new lows in early March, foiling the hopes of many that the low reached in late November last year was “the bottom”.
The remainder of March, however, saw an almost uninterrupted recovery of values to produce one of the strongest single months in many years. This much better tone continued into the first days of April, as economic reports continue to look somewhat brighter and the G-20 meeting in London seemed to produce some commonality in global response and a continued, if guarded, acceptance of American leadership.
But, the March come-back was not enough to overcome the severe losses earlier in the quarter. Overall results for the quarter were still very disappointing with most clients’ portfolios suffering losses in the high single digits to low double digits. Many portfolios benefited from allocations to fixed income, of course, to soften this blow; and client portfolios with allocations to emerging markets – the only equity asset class that posted positive returns for the quarter – were among the better results.
There was plenty to be afraid of … and there still is. The near collapse of several large banks, here and overseas, major auto companies on the brink of bankruptcy, continuing job losses, real estate value declines, and still flagging consumer confidence in the early months of this year combined to seriously depress investor confidence. Despite the encouraging recent performance, market measures may still not yet have reached their low points and a recovery in the fundamental world-wide economy is almost certainly at least several months away.
Many also fear that the size and character of governmental involvement in the economy will prove harmful to a robust private enterprise system. Populist intrusion on business and trade (punitive taxation of AIG bonuses, firing of CEO’s, protectionist measures in stimulus legislation) could mix with the inflationary pressures of very substantial fiscal and monetary actions to create a very weak economic recovery at best. Maybe worse, the apparently random experimentation of several government steps inspired little confidence that those very costly actions would even be effective to launch a recovery at all.
Why a Rebound?
Broad investment market values don’t just keep falling to zero. As Greg Schick and Bob Wagman discuss below, markets reflect actual tangible assets and real economic activity: millions of businesses and billions of workers around the world striving to produce true economic value. At some point, all the bad news does as much damage to the pricing of these assets and enterprises as it can.
But, more than simply a possible exhaustion of the downward pressures, there are positive signs of hope. Stimulus legislation (like it or not) is about to pump many billions into consumers’ hands. The Treasury’s plan to form a public/private collaboration to purchase large amounts of toxic assets should begin to finally unlock credit markets; and the Federal Reserve’s plan to purchase long-term Treasury securities will depress long-term interest rates, further facilitating a housing recovery by keeping mortgage rates low. Housing starts and home sales statistics are already reflecting modest increases, and consumer spending is up. Manufacturing output in China and US factory orders are up. Maybe most important, one can detect a stark shift in media and political rhetoric. Many commentators are now publicly admitting optimism instead of the former constant drumbeat of gloom.
We wish we could be sure. We can only be confident of what is likely. This recent rebound may be another false start, with more losses in value ahead. But, someday, and it is increasingly likely that day will be sooner rather than later, markets will convincingly recover, reflecting a genuine recovery of the underlying world economy. As Lauren Pressman illustrates in the article to follow, a full recovery of portfolio values as a consequence is a very good bet...eventually.
In the meantime, we will continue to work closely with clients to do our best to match their financial strategies and their investment portfolios to their needs for investment return and their newly tested tolerance for risk. In our conversations to date, fewer than 10% of our clients have actually decided to reduce significantly their risk exposures, by adopting larger fixed income allocations or, in a few cases, by deciding to stand completely on the sidelines by “cashing out” their investments. The other 90% plus have carefully, and in some cases, painfully, decided to remain on their existing strategic path in the expectation of eventual recoveries.
But none of our clients have escaped a certain level of emotional trauma over the losses of the last 18 months. Our role as comprehensive financial advisors is to connect with our clients on that emotional plane (and believe me, we are sympathetic; our firm’s revenues and our personal portfolios have suffered similarly deep declines), but still perform our role as dispassionate professionals to help our clients to make decisions on the intellectual plane as much as possible. This applies on the re-entry decision as much as on any exit. For those clients who have temporarily dialed-down their risk, and, especially, for those who have temporarily left the exercise entirely, we are developing plans for a structured return … both as to when it starts and how fast it’s completed … so that the resulting investment exposures can themselves be durable going forward from here.
In all cases, we are committed to remain a reliable and resourceful partner for our clients in the ongoing optimization of their overall finances – regarding investment portfolios and otherwise – in service of their specific goals.
Tim Kochis, CEO