"Stay the Course?"
Sydney M. Williams
When markets collapse, as they did yesterday (and as futures indicate they might this morning,) there is a temptation to go to ground. In fact, according to the Investment Company Institute, investors pulled $23.5 billion from equity funds last week, the most since the fall of 2008. That decline brought redemptions to $74 billion so far this year. (To put that number in perspective, the mutual fund industry comprises about $13 trillion, including about $1 trillion in ETFs. Bond funds make up about 20 percent, or $2.5 trillion. Money market funds hold another $2.6 trillion, leaving equity funds with about $7 trillion. According to the Investment Company Institute, mutual funds and ETFs controlled 27 percent of all equities at the end of 2010.) Despite a big up-day on Monday and a relatively flat Tuesday and Wednesday, I doubt that confidence was fully restored to permit a reversal of that trend. In fact, yesterday’s market assures the continuation of withdrawals.
This is not a new phenomenon. Ten years ago the S&P 500 closed at 1491.72, providing a decline of 23.4% over ten years before adjusting for dividends. Between March 2009 and the market’s peak in April of this year, the market had its fastest gain since 1936. Yet investors pulled a net of $72 billion from equity mutual funds. (That is net after Index Funds garnered $67 billion.) The Wall Street Journal had a recent article in which they questioned the survivability of the Magellan Fund, an icon of the 1980s and ‘90s. Between 2000 through 2010, the fund had net withdrawals of $63 billion. It now stands at $23 billon, a shadow of its former self. The last decade has seen two 50%+ bear markets and one flash crash – May 6, 2010 – in which $862 billion was wiped out in twenty minutes. Can it surprise anyone that investors between the ages of 18 and 30 have the largest cash positions (30%) of any age group?
The market collapse we are currently undergoing has its roots in Europe and in our dysfunctional government. The European banking crisis, brought about by sovereign debt issues, is being compared to the Lehman crisis of three years ago. As to whether that is a worthy comparison, I cannot say. My own opinion is that I find it unlikely that the Euro currency will remain viable, certainly not without a centralized European government. From my perspective, single currencies would have allowed Greece to devalue and would have hampered German exports. That suggests that Germany may be the biggest loser if the Euro ceases to exist. (The DAX is down 24 percent month to date, the largest monthly decline since September 2002.)
While the press and Washington politicians are trying to assign blame for the debt downgrade, the real cause was a spending program without a plan to repay the money. Nevertheless deficit reduction – spending cuts and revenue increases – are very much on the agenda today. The debate will still be rancorous, but it will be held.
The long term history of markets is one of rising prices, but for long periods – it took 25 years to top the 1929 peak in the DJIA and it took 16 years to move meaningfully above where the market was in 1966 – markets can be a bummer. It has now been 11 years since the S&P 500 first reached 1500. The question is how long can this go on? And the answer is, no one knows. But it is also instructional to keep in mind that the absolute market bottoms in both the 1929-1930s bear market and in the 1968-1970s bear market were made long before markets finally began rising to new levels. In the cases of both previous secular bear markets, there were embedded within those markets a number of cyclical bull and bear markets. That is likely to again be the case. As to whether the March 2009 lows hold, no one knows, but my uneducated guess is that they will.
One positive sign yesterday was that Birinyi Associates issued a bulletin in which they wrote that thus far in August 126 corporate buybacks had been announced, the most since October 2008. Corporate repurchases are worth watching. They are not perfect indicators by any means, but they played a big role in emerging from the October 1987 crash, and the record month for buyback announcements was September 2001, a week or so before that bottom was made.
The real determinant as to whether today’s market represents a buying opportunity largely depends on the economy. If the economy holds corporate profits should as well. If we head back into recession, forecasts will prove too optimistic. Again, I am not qualified to answer, but my sense is that sluggish growth will continue. To demonstrate that my ambivalence is not uncommon, yesterday Wells Capital said that the odds were high for an economic rebound while TCW put the odds at 70 percent U.S. GDP would go into reverse. I am sure both strategists have reams of supporting data. Regardless, one will be right and the other wrong.
My only point in this somewhat rambling piece is to keep things in perspective – not only consider what is happening, but also remember where we are in the broader scheme of things. Generally, at market peaks there is a universal sense of elation and at market bottoms a sense of despair. The question you must address is, is one sense dominant today?
Apart from Macbeth’s three witches, none of us can foretell the future. But that does not mean we can avoid it. In fact, there is only one way to avoid the future, a fate I don’t wish on anybody.
Thought of the Day
“Stay the Course?”
August 19, 2011This is not a new phenomenon. Ten years ago the S&P 500 closed at 1491.72, providing a decline of 23.4% over ten years before adjusting for dividends. Between March 2009 and the market’s peak in April of this year, the market had its fastest gain since 1936. Yet investors pulled a net of $72 billion from equity mutual funds. (That is net after Index Funds garnered $67 billion.) The Wall Street Journal had a recent article in which they questioned the survivability of the Magellan Fund, an icon of the 1980s and ‘90s. Between 2000 through 2010, the fund had net withdrawals of $63 billion. It now stands at $23 billon, a shadow of its former self. The last decade has seen two 50%+ bear markets and one flash crash – May 6, 2010 – in which $862 billion was wiped out in twenty minutes. Can it surprise anyone that investors between the ages of 18 and 30 have the largest cash positions (30%) of any age group?
The market collapse we are currently undergoing has its roots in Europe and in our dysfunctional government. The European banking crisis, brought about by sovereign debt issues, is being compared to the Lehman crisis of three years ago. As to whether that is a worthy comparison, I cannot say. My own opinion is that I find it unlikely that the Euro currency will remain viable, certainly not without a centralized European government. From my perspective, single currencies would have allowed Greece to devalue and would have hampered German exports. That suggests that Germany may be the biggest loser if the Euro ceases to exist. (The DAX is down 24 percent month to date, the largest monthly decline since September 2002.)
While the press and Washington politicians are trying to assign blame for the debt downgrade, the real cause was a spending program without a plan to repay the money. Nevertheless deficit reduction – spending cuts and revenue increases – are very much on the agenda today. The debate will still be rancorous, but it will be held.
The long term history of markets is one of rising prices, but for long periods – it took 25 years to top the 1929 peak in the DJIA and it took 16 years to move meaningfully above where the market was in 1966 – markets can be a bummer. It has now been 11 years since the S&P 500 first reached 1500. The question is how long can this go on? And the answer is, no one knows. But it is also instructional to keep in mind that the absolute market bottoms in both the 1929-1930s bear market and in the 1968-1970s bear market were made long before markets finally began rising to new levels. In the cases of both previous secular bear markets, there were embedded within those markets a number of cyclical bull and bear markets. That is likely to again be the case. As to whether the March 2009 lows hold, no one knows, but my uneducated guess is that they will.
One positive sign yesterday was that Birinyi Associates issued a bulletin in which they wrote that thus far in August 126 corporate buybacks had been announced, the most since October 2008. Corporate repurchases are worth watching. They are not perfect indicators by any means, but they played a big role in emerging from the October 1987 crash, and the record month for buyback announcements was September 2001, a week or so before that bottom was made.
The real determinant as to whether today’s market represents a buying opportunity largely depends on the economy. If the economy holds corporate profits should as well. If we head back into recession, forecasts will prove too optimistic. Again, I am not qualified to answer, but my sense is that sluggish growth will continue. To demonstrate that my ambivalence is not uncommon, yesterday Wells Capital said that the odds were high for an economic rebound while TCW put the odds at 70 percent U.S. GDP would go into reverse. I am sure both strategists have reams of supporting data. Regardless, one will be right and the other wrong.
My only point in this somewhat rambling piece is to keep things in perspective – not only consider what is happening, but also remember where we are in the broader scheme of things. Generally, at market peaks there is a universal sense of elation and at market bottoms a sense of despair. The question you must address is, is one sense dominant today?
Apart from Macbeth’s three witches, none of us can foretell the future. But that does not mean we can avoid it. In fact, there is only one way to avoid the future, a fate I don’t wish on anybody.
Labels: TOTD
posted by Thought of the Day @ 3:56 AM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home